Israel and the Palestinians are making progress towards reaching a framework peace agreement but they are not there yet, US Secretary of State John Kerry has told reporters.
Kerry was speaking after about three hours of talks with Palestinian President Mahmoud Abbas in Ramallah, the Palestinian seat of government in the West Bank.
Kerry is on his tenth trip to the region in the past year as he seeks to secure a peace deal. He said he would visit Saudi Arabia on Sunday to discuss the talks with King Abdullah.
Israel has freed 26 Palestinian prisoners as part of a deal that set in motion the current Israeli-Palestinian peace talks.
The decision to release the 26 has triggered anguish and anger in Israel, where many view the men as terrorists who have committed terrible crimes against Israelis.
But there were celebrations on the West Bank and the Gaza Strip, where the prisoners are seen as heroes who fought for independence, and were received by their families and Palestinian leaders.
The release was part of an agreement brokered by US Secretary of State John Kerry that brought Israel and the Palestinians back to the table for peace talks that had been paralysed since 2008.
A group of Israeli soldiers who were filmed dancing to Gangnam Style with Palestinians while on patrol in the West Bank have been disciplined by their superiors.
The Israeli military said it considered the incident "serious" and added: "The soldiers exposed themselves to unnecessary danger and were disciplined accordingly".
The footage, posted on YouTube and aired on Israeli TV, showed the armed soldiers in uniform dancing hand in hand and on the shoulders of Palestinian partygoers in Hebron, a common flashpoint for violence in the conflict.
One YouTube commenter suggested the soldiers should be nominated for the Nobel Peace Prize.
US Secretary of State John Kerry has held a "very frank" phone call with Israeli Prime Minister Benjamin Netanyahu in a bid to keep the move towards Middle East peace on track.
Mr Kerry said he held a "very frank and open, direct discussion of (Israel's announced new) settlements" that Palestinian negotiators said had threatened to "undermine" talks, which are set to resume tomorrow in Jerusalem.
He also spoke with Palestinian Authority President Mahmoud Abbas, who he said was "committed to continue to come to this negotiation," despite the building of 1,000 new apartments in Jewish settlements in East Jerusalem and the West Bank.
US Secretary of State John Kerry has said he does not believe Israel's approval of 1,200 new settlements home will derail the second round of Middle East peace talks this week.
Speaking during a visit to Colombia, he said: "I do not believe it will become what you call a speed bump in that sense."
He also restated the America's position that it views the settlements as illegitimate.
Mr Kerry added that the controversy underscored the importance of getting to the negotiating table quickly and resolving the questions with respect to settlements.
"Once you have security and borders solved, you have resolved the question of settlements," he told reporters.
An Israeli cabinet panel today decided to free 26 Palestinian prisoners over the next few days as part of a deal that will see peace talks resume, an official statement said.
The prisoners would be the first of four groups totalling 104 that prime minister Benjamin Netanyahu's cabinet last month agreed to release in a step aimed at renewing negotiations.
The decision comes three days before a scheduled second round of Israeli-Palestinian talks being held in Israel and the West Bank.
The chief negotiator for the Palestinian people Saeb Erekat has warned that his country's patience with new settlement building is 'limited' but said that he would not be forced to leave the negotiating table.
"Those who do these things are determined to undermine the peace negotiations, are determined to force people like us to leave the negotiating table," he said in an interview conducted before the announcement of the 1,000 new settlements was revealed.
"We are determined to give this effort of six to nine months every chance it deserves ... it's time for the Israeli government to choose negotiations and show good faith."
The Israeli Housing Minister Uri Ariel has approved plans to build 1,000 apartments in Jewish settlements in East Jerusalem and the West Bank.
Three days before the Israeli-Palestinian peace talks are to resume in Jerusalem, plans for nearly 800 apartments in east Jerusalem and nearly 400 in several large West Bank settlements have been approved.
Palestinian President Mahmoud Abbas had long insisted he would not resume talks without an Israeli settlement freeze. In the end, he relented under intense U.S. pressure.
The Israeli housing minister has cleared the way for building more than 1,000 new settlement homes, the Associated Press reports.
The news comes mediators for Israel and Palestine agree to further meetings in Washington to try and resolve their conflict.