Israel is seeking the release of an American jailed for life for spying for the Jewish state in return for concessions in the renewed peace process with the Palestinians, including the extension of a partial freeze on the expansion of settlements in the occupied territories.

According to Israel's army radio, the prime minister's office has approached Washington with a deal to continue the moratorium for another three months in return for the release of Jonathan Pollard, a former navy intelligence analyst convicted of spying in 1987. Binyamin Netanyahu, has long pressed for Pollard to be freed, but winning his release would help him sell concessions to rightwing members of his cabinet and the settlers.

Army radio said that Netanyahu had asked an unnamed intermediary to sound out the Obama administration on the proposal, but it is not known what response was received. Other Israeli media reported that the prime minister dispatched the intermediary to approach the Americans "discreetly, and unofficially".

Netanyahu's office initially said: "We know of no query to the Americans on this matter", but later was more equivocal. Israeli officials dismissed the prospect of a deal for Pollard's release over such a short time frame but, given that Netanyahu has attempted to attach the convicted spy's freedom to earlier peace talks, it is likely that the issue is being broached.

Danny Dayan, head of the Yesha Council of Jewish settlers, condemned any proposal to swap Pollard for an extension of the settlement freeze: "The very idea is an ugly form of blackmail. Should we also agree to give up the Golan Heights in exchange for Gilad Shalit [an Israeli soldier held by Hamas in Gaza]?"

However, any deal is likely to meet stiff resistance from US intelligence which has previously scuppered plans to free Pollard. Netanyahu has said Israel does not plan to extend the moratorium on settlement building, and officials are not commenting on how the issue might be resolved, saying only that Israel "does not want people leaving the table".

Mahmoud Abbas, the Palestinian president, told a French news agency that peace talks would be over if Israel abandoned the settlement freeze. "The negotiations will continue as long as the settlement remains frozen," he said. "I am not prepared to negotiate an agreement for a single day more."

Pollard's supporters in Israel and the US have tried to portray his actions as motivated by loyalty to the Jewish state. However, that position has been undermined because he was paid for the information and the FBI has claimed he also sold secrets to apartheid South Africa and attempted to pass them to Pakistan.

Pollard began passing US secrets to Aviem Sella, an Israeli military officer, in 1984 in return for cash and jewellery. He was caught the following year having passed tens of thousands of pages of documents. The full extent of the damage done by Pollard to US intelligence interests has not been made public but he is known to have given Israel comprehensive details of the US's global electronic surveillance network. Pollard was jailed for life under a plea agreement and his wife sentenced to five years in prison.

For more than a decade after Pollard was jailed, Israel denied that he was on its payroll, saying he was part of a rogue operation, even though it granted him citizenship in 1995.

Israeli leaders have persistently pressed for Pollard's release. At peace talks in 1998, Netanyahu told President Bill Clinton that "if we signed an agreement with Arafat, I expected a pardon for Pollard". Clinton later said he was minded to free Pollard but US intelligence, including George Tenet, director of the CIA, was strongly against it. However, another former CIA director, James Woolsey, has endorsed Pollard's release.

American intelligence was also angered by Israel's lack of co-operation in recovering the material passed on by Pollard and by its promotion of Sella to head an air force base – they saw this as a deliberate snub. Sella was eventually removed from that position after the US Congress threatened to cut funds to Israel.