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"It's been apparent for some time that the Israelis were going to fall short of what is necessary on the settlement freeze," one senior U.S. official said. "But our view is let's get to negotiations and settlements will be addressed within those final status issues"

A senior Israeli diplomat said Israel agreed to not building any new settlements, no outward expansion of existing growth and to only build for "natural" growth within existing settlements. He said Israel also agreed not to encourage Israelis to move to settlements, which would increase the population.

"A complete settlement freeze wasn't physically or politically possible, especially in the absence of any Arab or Palestinian concessions," the Israeli diplomat said. "There was a time the gaps had significantly narrowed, but now they were starting to widen. The administration recognized, rather than have them widen further, we should start negotiating."