RAMALLAH, West Bank, April 17 (Reuters) - U.S. President Barack Obama's Middle East envoy, George Mitchell, called on Friday for an Arab peace initiative to be part of a planned U.S. drive to create a Palestinian state.

The 2002 Arab initiative offers Israel normal ties with all Arab states in return for a full withdrawal from the lands it seized in the 1967 Middle East war, creation of a Palestinian state and a "just solution" for Palestinian refugees.

"The U.S. is committed to the establishment of a sovereign independent Palestinian state where the aspirations of the Palestinian people to control their destiny are realised. We want the Arab peace initiative to be part of the effort to reach this goal," Mitchell said after talks with Palestinian President Mahmoud Abbas in the West Bank city of Ramallah.

Mitchell met on Thursday with Israel's new prime minister, Benjamin Netanyahu, who has yet to commit to restarting U.S.-backed talks with Abbas on core issues such as statehood borders, and the future of Jerusalem and Palestinian refugees.

Israeli officials quoted Netanyahu as telling Mitchell that his right-leaning government wanted the Palestinians to first recognise Israel as a Jewish state. Palestinians have long rejected such explicit recognition of the Jewish nature of a state where one in five people is Arab.

"It is clear that there is a government in Israel that rejects signed agreements, that insists on continuing settlement activities," senior Palestinian negotiator Saeb Erekat said.

Erekat said Abbas asked Mitchell to "exert every possible effort" to pressure Israel to commit to a two-state solution and to meet other obligations, including a freeze in Jewish settlement building in the occupied West Bank and a halt to home demolitions in Arab East Jerusalem.

Netanyahu's two-week-old government has yet to take a public position on the Arab peace initiative.

But in their meeting on Thursday, Netanyahu spoke to Mitchell about "the need to involve in the process important moderate Arab states", including Egypt, Jordan and Saudi Arabia, a senior Israeli official said.

"They have an important role to play in strengthening the peace process and we see their greater involvement in the peace process as something positive," the official added.

Another senior Israeli official quoted Mitchell as telling Netanyahu that "we intend to seriously examine the Arab proposal".

A senior Western diplomat familiar with the Obama administration's deliberations said Washington wanted to pursue the Arab peace initiative but was keeping its options open.

"We have put the flag squarely in the two-state solution camp but we haven't said how you get there," the diplomat said.

Netanyahu's predecessor, Ehud Olmert, said he saw positive points in the Arab peace initiative.

But Israel opposes the return of Palestinian refugees to their former homes in what is now the Jewish state and wants to hold on to major settlement blocs in the West Bank.

Mitchell's next stop is Egypt. (Additional reporting by Adam Entous in Jerusalem, Writing by Adam Entous and Ori Lewis; Editing by Dominic Evans)