Obama warns of 'fallout' for Israel if peace effort fails

WASHINGTON (Reuters) - President Barack Obama, issuing a veiled warning to Israeli Prime Minister Benjamin Netanyahu on the eve of talks, said in an interview published on Sunday it would be harder for Washington to defend Israel against efforts to isolate it internationally if U.S.-led Middle East peace talks fail. Obama, speaking to Bloomberg View, also made clear that he would press Netanyahu to allow him the time needed to test Iran's willingness to curb its nuclear ambitions, despite the Israeli leader's deep skepticism of the West's diplomatic engagement with Tehran. Responding to the interview, a senior Israeli cabinet minister said the Netanyahu government was serious about peace but would not be pressured into endangering the Jewish state. Obama said the "the window is closing" for a peace deal between Israel and the Palestinians, and called on Netanyahu to "seize the moment" to help achieve a framework agreement that Secretary John Kerry is trying to forge to extend peace talks. Obama said his message to Netanyahu in a White House meeting scheduled for Monday would be: "If not now, when? And if not you, Mr. Prime Minister, then who?" Obama said if peace talks fail and Israel presses ahead with expansion of Jewish settlements on occupied land in the West Bank, then Washington would have limited ability to protect it from "international fallout." Though he did not specify what kind of actions Israel might face, Palestinians have threatened to try to join international tribunals where they could make their case against Israel. The Jewish state is also facing a boycott and divestiture movement that has made some inroads in Europe but has had little impact in the United States. "What I do believe is that if you see no peace deal and continued aggressive settlement construction and ... if Palestinians come to believe that the possibility of a contiguous sovereign Palestinian state is no longer within reach, then our ability to manage the international fallout is going to be limited," Obama said. TESTY TIES Kerry's recent warning that failure to resolve the Palestinian issue could fuel anti-Israel boycotts stirred controversy in Israel, where he was accused of trying to pressure for concessions. Obama's comments, made in an interview on Thursday, were published shortly before an Oval Office meeting in which Iran is expected to be the thorniest issue. The two leaders have a history of sometimes testy relations. The Obama interview was received coolly by Israeli Strategic Affairs Minister Yuval Steinitz, a Netanyahu confidant who accompanied the prime minister to the United States. "I didn't like all of the remarks. I think there is no reason to put pressure on Israel," he told Israel's Army Radio. "Netanyahu will, I think, give a clear answer: 'We are ready for peace. We want to advance a diplomatic accord. But we, rightly, worry about and fear for our national security.'" In the interview, Obama repeated his opposition to any congressional move to impose further sanctions on Iran while it is engaged in talks with Washington and other world powers. "It is profoundly in all of our interests to let this process play itself out," Obama said. " Let us test whether or not Iran can move far enough to give us assurances that their program is peaceful." Saying that new sanctions would derail diplomacy, Obama said: "You don't start shooting in the middle of the room during the course of negotiations." However, Obama did not touch on the main point of contention - Netanyahu's demand that Iran be forced, in a final nuclear deal, to dismantle all of its uranium enrichment centrifuges, compared to the president's suggestion that Tehran could be allowed a small program for civilian purposes. Steinitz said the current course of the diplomacy could turn Iran into a "nuclear threshold state" - with the required infrastructure to get the bomb in short order. Obama insisted that, contrary to Netanyahu's assertions, existing sanctions on Iran are largely holding. He also expressed confidence that Tehran was convinced he was keeping all options on the table, including military action, should diplomacy fail and Iran seek to develop a nuclear weapon. "I know they take it seriously," Obama said. Iran says it is not seeking a nuclear bomb and that its nuclear program is strictly for peaceful civilian purposes. (Reporting by Matt Spetalnick, Mark Felsenthal and Dan Williams; Editing by Eric Walsh)