JERUSALEM, May 19 (Reuters) - Jewish settler leaders on Tuesday shrugged off U.S. President Barack Obama's call for Israel to halt settlement building in the occupied West Bank, saying Palestinians needed to "halt terror first".

Dani Dayan, chairman of the West Bank settlers' umbrella organisation Yesha Council, said he felt assured that domestic political support would allow settlers to continue to live in the occupied West Bank.

"The Israeli electorate set a clear line for this government ... we have strong support in the new Knesset (parliament) and the things we hear among politicians certainly encourage us that if Netanyahu (halts settlement building) the Knesset will stand at our side," Dayan told Reuters.

Israeli Prime Minister Benjamin Netanyahu met Obama for talks at the White House on Monday and the U.S. president afterwards reminded Israel of its commitment under a 2003 U.S.-backed peace "road map" to stop settlement building in the occupied West Bank.

"Obama's words were factually incorrect," Dayan said. He relied on the road map, but it does not impose on Israel to halt building in Judea and Samaria (the West Bank), because the Palestinians do not carry out their commitment, which comes beforehand, to stop terror."

About half a million Jews live in more than 100 settlements Israel has built on land Israel captured in the 1967 Middle East war in the West Bank and Arab East Jerusalem, territory in which close to three million Palestinians live.

The United States and the European Union view all Jewish settlements in the West Bank as illegal under international law and as obstacles to peace.

HOMELAND

Political commentators in the Israeli media on Tuesday said Netanyahu would have to avoid conflict with his coalition partners, most of whom are right-wing parties, in order to keep his potentially fractious coalition intact.

Israeli columnist Nahum Barnea said in the mass-circulation Yedioth Ahronoth newspaper that Netanyahu could argue that he is powerless to halt Israel's settlement activity.

"We will continue to squabble with the (U.S.) administration on the issue of settlements," Barnea wrote.

"All administrations were unhappy with Israel on this issue but the Obama administration differs from its predecessors only in that it sees the matter as the real problem. Netanyahu's only argument against this is that if he freezes (settlement building) he will be toppled."

Pinhas Wallerstein, another settler leader, said Israel would have to listen to American wishes but would also need to consider the needs of settlers.

"We won't have a choice but to take into account American wishes because they are our friends," he said.

A dispute with the United State would be serious for Israel "but they will also have to consider Israeli wishes ... we don't have to be 'in your face' and provoke them but we have to carry on our daily lives," Wallerstein told Army Radio.

Obama again voiced strong support for creation of a Palestinian state in his talks with Netanyahu, who held back from endorsing this cornerstone of Washington's Mideast policy.

"We talked about restarting serious negotiations on issues of Israel and the Palestinians," Obama said, adding that it was in both sides' interests "to achieve a two-state solution".

Netanyahu, whose right-leaning coalition includes parties opposed to a two-state solution, has not publicly endorsed the creation of a Palestinian state.

Since he was sworn in on March 31, Netanyahu has promised to pursue talks with the Palestinians on an economic, security and political track. He says any Palestinian entity must have limited powers of sovereignty and no army.

Senior Palestinian negotiator Saeb Erekat said moving the Middle East peace process forward hinged on Israel implementing its obligations under existing agreements.

"Only a reversal in Israel's policies on the ground can restore credibility to the peace process. This includes an immediate and complete freeze on all settlement activity, including all natural growth," Erekat said.

But hardline settler leader Nadia Mattar said Jewish settlers would never agree to a freeze.

"Nobody can freeze a people who live in their homeland. This is our homeland. Nobody's going to tell us not to live here. Nobody's going to tell us not to expand here," Matar said in the West Bank settlement of Efrat. (Editing by Douglas Hamilton and Samia Nakhoul)