Pressure Grows on Israel at London Peace Talks

Israel faced concerted Arab and international demands to freeze all settlement activity in the West Bank and ease the humanitarian crisis in Gaza yesterday as the "Quartet" of Middle East peacemakers took stock of a deteriorating situation on the ground and fading hopes for a peace agreement by the end of this year.

Kuwait's decision to release $80m (£40m) to fund the western-backed Palestinian Authority was one of the few bright spots in a day of high-level talks in London. Behind closed doors Saudi Arabia, leading pro-western Arab states, described the regional situation as "dire".

Salam Fayyad, the Palestinian prime minister, warned bluntly that peace efforts might collapse. "Israel has failed to meet any of its obligations from the 'road map', including a freeze in settlement activity," he said after meeting the Israeli foreign minister, Tzipi Livni. "That is most troubling. Unless that changes, the political process is being stripped of its meaning."

Diplomats said that a ceasefire between Israel and the Islamist movement Hamas, which controls Gaza, was possible, with expectations mounting that Egypt will send its intelligence chief to Israel next week to thrash out a package that could end months of Palestinian rocket fire and Israeli raids and free an Israeli soldier held captive for two years.

Overall, though, the mood was bleak at the biggest international meeting on the Middle East held this year. Even the usually optimistic Tony Blair, the Quartet envoy, sounded frustrated. "We've been working on proposals to improve conditions on the West Bank," he said. "These are economic projects, lifting access restrictions, trying to build a better life for ordinary Palestinians. I hope in the next few weeks to get a response from Israel."

The harshest comments came in a private session at Lancaster House from Saudi Arabia's veteran foreign minster, Prince Saud al-Faisal, reflecting deepening gloom among the US-backed Arab countries which support the Annapolis talks ceremonially launched by George Bush last November but which have yet to show any concrete results.

"Many dangers loom," warned the prince. "It seems we have reached a stage that I can only describe as a morass." He attacked Israel for insisting on achieving "absolute security" which meant "absolute insecurity" for the Palestinians.

Israel insists progress is being made, but few are convinced. "It's hard work and labour intensive and I know there's skepticism, but they do have a chance to get an agreement by the end of the year," said Condoleezza Rice, the US secretary of state.

The Quartet, comprising the US, EU, US and Russia, expressed "deep concern" at continuing settlement activity by Israel and used the same phrase - one of the sharpest in the diplomatic lexicon - about conditions in the Gaza Strip.