Israeli Prime Minister Benjamin Netanyahu and Palestinian Authority President Mahmoud Abbas met alone behind closed doors for more than an hour and a half Thursday in a State Department room just outside Clinton’s office. The one-on-one meeting followed their on-camera pledges to move the peace process forward and their hardy handshake with Clinton in the middle.

But several diplomatic sources involved in the summit said the two leaders emerged from their meeting in a stalemate over whether Israeli settlements should continue.

The two leaders met with Clinton to give a readout of their meeting.

According to Fadi Elsalameen, who accompanied Abbas, the two leaders were very blunt about their opposing views.

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Netanyahu is under pressure from the Palestinians and the Obama administration to extend a 10-month moratorium on building Israeli settlements in the disputed West Bank territory. That moratorium is set to expire September 26. Netanyahu’s conservative coalition government wants the Israeli prime minister to end the moratorium.

Elsalameen said that during the leaders’ private discussion, Abbas asked Netanyahu to extend the settlement freeze.

Netanyahu reportedly said, “I cannot extend.”

Elsalameen says Abbas responded, “Then I cannot continue.”

Before the summit even began, Abbas had threatened to abandon final status talks if Netanyahu allowed Israeli settlements to go forward. The Palestinian leader is trying to show he’ll keep his word.

Elsalameen said Clinton was asked about what would happen if Israel continued to expand the controversial Jewish settlements. Elsalameen said Clinton responded, as Obama had publicly stated, “Then all bets are off.”

Despite the standoff between the Palestinian and Israeli leadership, Elsalameen said that starting Sunday, their chief negotiators will meet on a daily basis to try to entertain compromises.

According to U.S., Israeli and Palestinian officials, the hope is that during those talks, some trust and confidence will be developed, and some of the other issues will be settled, possibly making it easier to find a formula for extending the moratorium.

The issue could then be discussed when Netanyahu and Abbas meet again in Egypt on September 14 and 15.

Both sides, and the Americans, fully expect some formula to be found at the last minute to extend the moratorium, the officials said. Obama told the leaders not to ruin this opportunity, according to the sources, and to make sure the 26th of September goes by quietly without incident

While nothing was agreed to, officials from both sides said the tone of this week’s talks was fairly decent, and they expressed cautious optimism. Netanyahu was apparently in a good mood after the meetings, and Abbas, who was nervous and tense the night before the talks, seemed to come away from them in a better mood. He didn’t feel pressured as he has been recently and was appearing to aides to be a little more relaxed and confident, they said.

Elsalameen said Abbas would be visiting Libya and Tunisia to drum up support for the Palestinian people.

CNN Senior State Department Producer Elise Labott contributed to this report.

Settlements remain obstacle in talks

Obama renewed his call for the languishing bill in the wake of Friday’s release of new unemployment figures. The jobless rate, according to the Labor Department, rose from 9.5 percent to 9.6 percent in August.

The economy lost a total of 54,000 jobs last month. Most of the losses, however, came from the public sector as the government cut 114,000 temporary census workers. Private businesses added 67,000 jobs to their payrolls.

August was the eighth straight month that businesses added jobs, following nearly two straight years of job losses. So far this year businesses have added 763,000 workers to payrolls.

“That’s positive news,” Obama said at the White House, flanked by his top economic advisers. It “reflects steps we’ve already taken to break the back of this recession.”

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But he warned, “There’s no quick fix to the worst recession we’ve experienced since the Great Depression.”

Senate Republicans, he said, were responsible for a “needless delay” in the passage of legislation designed to increase bank loans to small businesses. Specifically, the measure would set up a $30 billion lending fund to help community banks offer small businesses credit. It also would provide tax breaks to small businesses that invest in new equipment and hire unemployed workers.

The House of Representatives passed a similar bill in June. Republican opposition has focused, among other things, on the cost of the measure.

Republicans lashed back at the president, blaming him for what most observers still characterize as a weak recovery.

“Today’s jobs report is a clear demonstration that the American economy still has a long way to go,” said Rep. Eric Cantor of Virginia, the House minority whip.

“The policies being pursued by the White House and Democrat leaders in Washington continue to create uncertainty and fear that is inhibiting productivity, innovation and job creation.”

In a statement, Republican National Committee Chairman Michael Steele said, “With 54,000 more Americans finding themselves out of work this month and unemployment rising to 9.6 percent, President Obama’s ‘Recovery Summer’ has ended right where it began, with Americans continuing to lose their jobs and unable to find new ones.”

Obama defended his decision to push the “Recovery Summer” theme.

“I don’t regret the notion that we are moving forward … because of the steps that we’ve taken,” he told reporters. “The key point I’m making right now is that the economy is moving in a positive direction. … We just have to speed it up.”

Christina Romer, head of the President’s Council of Economic Advisers, said the “Recovery Summer” theme was chosen to reflect that a large number of projects funded by the $862 billion stimulus act came to fruition — a fact reflected in an uptick in the number of construction jobs.

Republicans have criticized the stimulus package for adding to the national debt while failing to boost economic growth sufficiently.

CNN’s Paul Steinhauser and Alan Silverleib contributed to this report.

Obama promises new jobs initiatives

U.S. Secretary of State Hillary Clinton is set to play the main role in the talks by hosting a meeting Thursday at the State Department with Israeli Prime Minister Benjamin Netanyahu and Palestinian leader Mahmoud Abbas.

The two sides will be relaunching talks that have been stalled for a year and a half.

On the eve of the talks, Obama held a working dinner with Abbas, Netanyahu, Egyptian President Hosni Mubarak and Jordan’s King Abdullah II.

“I am hopeful — cautiously hopeful, but hopeful — that we can achieve the goal that all four of these leaders articulated,” Obama said before dinner.

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Clinton and Middle East Quartet Representative Tony Blair also attended the dinner. The Quartet consists of the United States, Russia, the United Nations and the European Union.

Netanyahu and Abbas reiterated their goal to come up with a solution and condemned attacks against the Israelis in recent days.

“We don’t seek a brief interlude between two wars, we don’t seek a temporary respite between outbursts of terror,” Netanyahu said. “We seek a peace that will end the conflict between us once and for all… for our generation, our children’s generation and the next.”

Abbas said it was time to end the bloodshed from Israelis and Palestinians.

“We want peace between the two countries … let us sign a formal agreement for peace and put an end to this long period of suffering forever,” he said.

As the talks begin, other issues loom. One immediate threat is the September 26 expiration of Israel’s 10-month freeze on settlement construction in the West Bank.

Another roadblock is the Palestinian view that any two-state solution must include a handover of all the land Israel captured in the 1967 war, along with East Jerusalem as the Palestinian capital.

While Netanyahu has expressed openness about a Palestinian state, he also has strong opposition to a Palestinian takeover of East Jerusalem.

Hamas’ control of Gaza also remains a “major problem,” Chief Palestinian negotiator Saeb Erakat said.

While Gaza is generally considered to be part of any future Palestinian state, Hamas has refused to recognize Israel’s right to exist and is not a part of the talks.

Leaders of Hamas are frequently in conflict with the more moderate Abbas and his Fatah organization, which has the upper hand in the West Bank.

With the U.S. war in Iraq drawing to a close, the Middle East has moved front and center for administration officials.

In earlier remarks from the White House Rose Garden, Obama said that “this moment of opportunity may not soon come again.” However, he also pointed to challenges ahead.

“We are under no illusions,” he said. “Passions run deep … there’s a reason that the two-state solution has eluded previous generations — this is extraordinarily complex and extraordinarily difficult.”

Several top officials close to the negotiations told CNN that it is hard to be optimistic about a peace deal at the moment. They downplayed expectations, saying that nobody directly involved in the talks expects a deal to be reached this week. But simply resuming talks was a critical step, and a comprehensive Middle East peace deal has been one of Obama’s top foreign policy goals, they said.

CNN’s Ed Henry, Alan Silverleib, Hala Gorani and David Molko contributed to this report

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The officials stressed to CNN that nothing is firm yet and there is a lot of progress that still needs to be accomplished starting with a dinner President Barack Obama is hosting Wednesday night with Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas in the Old Family Dining Room of the White House.

Mubarak also is attending the dinner along with King Abdullah of Jordan, Secretary of State Hillary Clinton and Mideast Quartet Representative Tony Blair. On Thursday, Clinton will be hosting Abbas and Netanyahu at the State Department in Washington for the actual start of direct talks between the two parties for the first time in nearly two years.

Ambassador Soliman Awaad, a spokesman for Mubarak, told reporters late Wednesday that Egypt is ready to host a second round of discussions between Abbas and Netanyahu at some point between now and September 26, when Israel’s 10-month moratorium on Jewish settlement construction in the West Bank will expire.

Abbas has declared that the peace talks will end if Israel does not extend the freeze on settlements, while Netanyahu is under great pressure within his country to end the moratorium altogether, just one of many difficult issues to be worked out.

Awaad warned that if the moratorium is not extended then “all bets are off” in terms of negotiations.

Egypt might host second round of Mideast peace talks