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By Lesley Wroughton
TEL AVIV (Reuters) - U.S. Secretary of State John Kerry ended a shuttle diplomacy mission on Sunday without an agreement on resuming Israeli-Palestinian peace talks, but said gaps had been narrowed and he would return to the region soon.
"I'm pleased to tell you that we have made real progress on this trip. And I believe that with a little more work, the start of final status negotiations could be within reach," he told a news conference before his departure from Tel Aviv's airport.
"We started out with very wide gaps and we have narrowed those considerably," he said, without elaborating.
"We are making progress. That's what's important and that's what will bring me back here."
Over four busy days, Kerry met Israeli and Palestinian leaders repeatedly and separately to try to find a compromise for reviving direct talks, stalled since late 2010 in a dispute over Jewish settlements on occupied land Palestinians want for a state.
Palestinian President Mahmoud Abbas has said negotiations cannot resume until Israel halts settlement-building, which most countries deem illegal, in the West Bank and East Jerusalem, areas it captured in a 1967 Middle East war.
Israeli Prime Minister Benjamin Netanyahu has refused to declare a new moratorium following a partial, 10-month construction halt that ended in September 2010. Neither side gave any sign they had budged from those positions.
"There was an attempt (by Kerry), and to our regret it has been so far unsuccessful. But as the secretary of state said, there is still room for more work and it is possible the formula will be found," Civil Defense Minister Gilad Erdan, a member of Israel's security cabinet, told Army Radio.
In the West Bank city of Ramallah, Palestinian chief negotiator Saeb Erekat said there had been some progress in the three sessions of talks between Kerry and Abbas, and further meetings would be held with U.S. representatives following his departure.
The issue of Palestinian prisoners held by Israel - a highly emotional issue for Palestinians, who view them as heroes in a struggle for statehood - has also been a sticking point.
An Israeli official, who asked not to be identified, said Abbas was seeking the release of long-serving security prisoners as a goodwill gesture. But Netanyahu believed the issue should be addressed only after talks resume, the official added.
"Releasing murderers with blood on their hands carries a very problematic deterrence message for future murderers in the area," Erdan said.
Netanyahu, who met overnight with Kerry for six hours, reiterated at Sunday's weekly meeting of his cabinet that Israel was prepared to enter into negotiations with the Palestinians "without delay and without preconditions".
But in his remarks, he also pointedly referred to Israel's security concerns in any future peace deal.
For new talks to be held, Abbas has said Netanyahu must recognize the West Bank's boundary before its capture by Israel as the basis for the border of a future Palestinian state.
Israel, seeking to keep major settlements under any peace accord, has rejected those terms and has said its security forces would not be able to defend the pre-1967 frontiers.
Erdan, asked if continued impasse could lead to a third Palestinian uprising, said: "I do not think this is the situation. On the other hand, you never know and it is possible a wave of violence could build up."
But he added, "that doesn't mean we need to take steps that will worsen our position".
Kerry, who has come to the region five times since taking office, said both Netanyahu and Abbas had asked him "to return to the area soon". "(That is) a sign that they share my cautious optimism," he added.
Kerry is keen to get fresh peacemaking under way before the United Nations General Assembly, which has granted de facto recognition to a Palestinian state, convenes in September.
Netanyahu is concerned that the Palestinians, in the absence of direct peace talks, could make further moves at the U.N. session to get their statehood recognized, circumventing Israel.
But Kerry said the pace of his diplomacy was set by the two sides, whom he described as sincere about finding a way forward.
"We're not going to get stuck with artificial deadlines. That's a big mistake," he said before flying to Asia.
(Additional reporting by Ali Sawafta in Ramallah; Writing by Jeffrey Heller and Dan Williams; Editing by Andrew Roche)