Netanyahu says backs 'contiguous' Palestinian state

* Hours earlier Israel grants legal status to three settlements

* Activists say the settlements are Israel's first since 1990

* US voices concern the decision not "helpful" to peace

JERUSALEM - Israeli Prime Minister Benjamin Netanyahu voiced support on Tuesday for the first time for Palestinians to establish a contiguous state, saying their future country should not look like "Swiss cheese".

Boys walk with their bicycles on a pavement in the West Bank Jewish outpost of Bruchin April 24, 2012. Israel said on Tuesday it had granted legal status to three settlement outposts, including Bruchin, in the occupied West Bank, a move that could shore up the governing coalition but which drew sharp Palestinian condemnation. [Photo/Agencies]

But only hours earlier, a ministerial committee in his right-wing government granted Israeli legal status to three previously unauthorised Jewish settlement outposts in the occupied West Bank, drawing Palestinian and international criticism.

Palestinians fear such outposts and the 130 formal settlements Israel has built in the territory it captured in a 1967 war will deny them a viable state.

Asked on CNN's  Erin Burnett Outfront programme whether he would accept the Palestinians' belief they should have a country that is contiguous, Netanyahu replied: "Yes."

"Not as a Swiss cheese? No," Netanyahu added, addressing a key Palestinian concern, that the state they seek would be comprised of pockets of villages and towns surrounded by Israeli settlements.

Netanyahu previously has said Israel would be "generous about the size" of a future Palestinian state, but he has not echoed US President Barack Obama's call for a contiguous country to emerge from Middle East peace talks - frozen since 2010 over the settlement issue

His change of tone on the nature of a Palestinian state came a week after he received a letter from Palestinian President Mahmoud Abbas that repeated a call for an end to all settlement activity and put the onus on Israel to take action to get peace talks moving again.

Palestinians are awaiting a formal response to the letter.

In a statement before the CNN interview, Netanyahu's office said the ministerial panel "decided to formalise the status of the three communities ... which were established in the 1990s following the decisions of past governments".

Most of the international community views all Jewish settlements in the West Bank as illegal. Israel distinguishes between settlements it has approved and outposts which were never granted official authorisation.        

Some 350 settlers live in the outposts whose status was changed -- Bruchin and Rechelim, both in the northern part of the West Bank and Sansana to the south.

Netanyahu, though politically strong, has faced questions within his own Likud party and other right-wing coalition partners about his commitment to settlements, especially after police three weeks ago evicted settlers from a building they said they had bought from a Palestinian in the city of Hebron.

US CONCERN

Israel's main ally, the United States, voiced concern over the decision on the outposts.

"We don't think this is helpful to the process. We don't accept the legitimacy of continued settlement activity," State Department spokeswoman Victoria Nuland said.

Nabil Abu Rdainah, a spokesman for Abbas, charged that "Netanyahu has pushed things to a dead end yet again" and dismissed his nod for a "contiguous" state that would mean removing some settlements as "not enough".

"We're ready to return to peace talks immediately if Netanyahu commits to stopping settlement construction and recognises the 1967 borders," Abu Rdainah said.

Netanyahu, who partially froze building in Jewish settlements for 10 months two years ago to coax Palestinians back into negotiations, has said the issue should be resolved in face-to-face talks.

For years, Israel has promised Washington it would remove dozens of outposts but has done little to fulfil the pledge in the face of domestic political pressure.

Peace Now, an Israeli anti-settlement group, said the change of the three outposts' status marked the first time since 1990 that the Israeli government had established a new settlement, adding that the four-man committee did not have the authority to approve the change.

An Israeli official disputed that view, saying the outposts had effectively been approved by past governments but technical matters delayed their legalization.    

Separately, Netanyahu moved to patch up differences within his coalition over the future of a neighbourhood threatened with demolition inside the West Bank settlement of Beit El.

One right-wing cabinet member cautioned the coalition could fall if the homes were destroyed.

Israel has promised the Supreme Court, which is looking into Palestinian claims of ownership to the land, that it will evict the settlers in the disputed homes by May 1. Netanyahu said on Tuesday he would ask the court to push back that deadline.

Some 500,000 Israelis live in the West Bank and East Jerusalem, also captured in 1967. The two areas are home to 2.4 million Palestinians.