Barack Obama is close to brokering an Israeli-Palestinian deal that will allow him to announce a resumption of the long-stalled Middle East peace talks before the end of next month, according to US, Israeli, Palestinian and European officials.

Key to bringing Israel on board is a promise by the US to adopt a much tougher line with Iran over its alleged nuclear weapons programme. The US, along with Britain and France, is planning to push the United Nations security council to expand sanctions to include Iran's oil and gas industry, a move that could cripple its economy.

In return, the Israeli government will be expected to agree to a partial freeze on the construction of settlements in the Middle East. In the words of one official close to the negotiations: "The message is: Iran is an existential threat to Israel; settlements are not."

Details of the breakthrough deal will be hammered out tomorrow in London, where the Israeli prime minister, Binyamin Netanyahu, is due to hold talks with the US special envoy, George Mitchell. Netanyahu met Gordon Brown today in Downing Street, where the two discussed both settlements and the Iranian nuclear programme.

Although the negotiations are being held in private, they have reached such an advanced stage that both France and Russia have approached the US offering to host a peace conference.

Obama has pencilled in the announcement of his breakthrough for either a meeting of world leaders at the UN general assembly in New York in the week beginning 23 September or the G20 summit in Pittsburgh on 24-25 September.

The president, who plans to make his announcement flanked by Netanyahu and the Palestinian leader, Mahmoud Abbas – plus the leaders of as many Arab states as he can muster – hopes that a final peace agreement can be negotiated within two years, a timetable viewed as unrealistic by Middle East analysts.

Obama had hoped to unveil his plans before the start of Ramadan last weekend but failed to complete the deal with the Israelis or the Arab states in time.

As well as a tougher US approach to Iran, which the Israelis see as their top priority, the deal would see Israel offering a temporary and partial moratorium on the expansion of settlements on the West Bank in return for moves by Arab states towards normalisation of relations. This would allow Obama to announce talks on the bigger Israeli-Palestinian issues – borders, the future of Jerusalem and the future of Palestinian refugees – with the US sitting in as a mediator.

After the meeting at No 10 today, Netanyahu said he was hopeful that a compromise would be reached to allow the peace process to restart while Israeli settlers could "continue living normal lives". Brown said he emerged from the talks more optimistic about Middle East peace. He also pledged that if there were no immediate progress on the Iranian nuclear impasse, further sanctions would be "a matter of priority".

Although Netanyahu told his cabinet before leaving Israel that the deal would not be sealed in London tomorrow, he and Mitchell are now down to the fine detail.

Israel is offering a nine- to 12-month moratorium on settlement building that would exclude East Jerusalem and most of the 2,400 homes that Israel says work has already begun on.

Ian Kelly, a US state department spokesman, on Monday reflected the increasing optimism within the Obama administration, saying "we're getting closer to laying this foundation" for the resumption of talks.

Another official closely involved in the discussions said: "It has been pretty hard going but we are getting there. We are closer to a deal with the Israelis than many think. The Arabs are more difficult to pin down."

If Iran does not respond to UN demands that it stop enriching uranium by time of the UN and G20 summits, the US, Britain and France are to lead a UN security council push to expand sanctions, expected to target Iran's dependence on imports of refined petroleum products and its reliance on foreign technology to develop its oil and gas industry.

Russia and China are expected to object to such punitive measures, and any western attempt to enforce a partial embargo threatens to breach the broad international consensus on handling Iran.

A report on the Iranian programme by the UN's nuclear watchdog, the International Atomic Energy Agency (IAEA), due to be published by the end of this week, will be crucial in setting the scene for such sanctions, and the outgoing IAEA director general, Mohamed ElBaradei, has come under intense western pressure to make the report sharply critical of Tehran.

Israel, in return for a deal on settlements, is seeking not only a tougher line over Iran but normalisation of relations with Arab states, such as overflight rights for its airline El Al, establishment of trade offices and embassies, and an end to the ban on travellers with Israeli stamps in their passports.

Bahrain, Qatar, the United Arab Emirates and Morocco have so far tentatively agreed. Saudi Arabia has refused, saying Israel has had enough concessions.

But the US is taking comfort from the fact that, crucially, Saudi Arabia has not tried to block other Arab states from signing up. "They may come on board last, but they will come on board," a European official said.

A coalition of Arab states, thought to include the Saudis, has been in secret contact with Israel to discuss what they see as a common threat posed by Iran.