New York – U.S. President Barack Obama told Prime Minister Benjamin Netanyahu on Wednesday that continued construction at the Israeli settlements in the West Bank and East Jerusalem is threatening the future of the two-state solution.

According to a senior American official, in their half-hour long meeting in New York on the sidelines of the UN General Assembly, Obama raised "profound U.S. concerns about the corrosive effect that that settlement activity, that is continuing when the occupation enters its 50th year, is having on the prospects of two states solution."

The official added that Netanyahu pushed back on this. "They've never papered over their differences," he said.

The meeting between Obama and Netanyahu took place only a few days after the two nations signed a new 10-year military aid deal. The meeting will most likely be the last between the two leaders before Obama leaves the White House in January.

Obama and Netanyahu meeting in New York.

A senior Israeli official who is familiar with the details of the conversation between the two told journalists at a briefing that the disagreement about the settlement issue came up but was not the main topic of discussion.

The senior official, who described the meeting as positive, noting that it lasted for an hour and a quarter and not the half-hour claimed by U.S. officials, said Netanyahu told Obama that the settlements are not the root of the conflict today and were not the root of the conflict when Israel left Gaza.

“Netanyahu and Obama had two main disagreements through the years – Iran and the question of what was blocking an agreement with the Palestinians,” the senior official said. “With all due respect to the settlements, they are not the problem. The problem is the stubborn refusal of the Palestinian leadership to yield on the right of return and to recognize the Jewish state within any borders.”

The senior official noted that Netanyahu did not raise the possibility that Obama might make a move in the UN Security Council on the Israeli-Palestinian issue during the period between the American elections in November and the end of his term on January 20.

“The issue didn’t come up and they didn’t talk about it,” the senior official said. “There’s an elephant in the room. Netanyahu knows there’s an elephant and Obama knows there’s an elephant and both know that the other knows that there’s an elephant in the room.”

During the meeting Netanyahu discussed his belief that it’s possible to leverage the developing ties between Israel and the Arab world to advance the peace process with the Palestinians.

“Netanyahu told Obama that he sees this as creating different options than existed in the past,” the senior official said. “Until now there had never been such a clear Arab interest in reaching understandings and cooperating with Israel.”

At the outset of the meeting, Obama told reporters that he will be interested in hearing Netanyahu's assessment about the conditions in Israel and the West Bank. "There is great danger of terrorism and flair ups of violence and we also have concerns about settlement activity. We want to see how Israel sees the next few years... because we want to make sure that we keep alive this possibility of a stable secure Israel at peace with its neighbors and a Palestinian homeland that meets the aspirations of the Palestinian people," said Obama.

Obama's comments reflected the view of the American administration that the two-state solution is in real danger of becoming irrelevant in the near future, mostly because of the construction in the settlements and the diplomatic freeze between Israel and the Palestinians. The Americans think the situation on the West Bank and the present trends are leading to a reality of a single bi-national state.

The U.S. administration has been holding discussions over the past few months about the possibility of advancing a move in the UN Security Council on the Israel-Palestinian issue, after the U.S. presidential elections in November and before Obama leaves office. Deputy National Security Advisor for Strategic Communications Ben Rhodes said in a press briefing before the meeting that he does not rule out the possibility that Obama will decide to carry out such a step before the end of his term, but Rhodes made it clear that for now he has no such plan.

At the outset of the meeting, Netanyahu remarked in general about the Palestinian issue, and said: "The greatest opportunity is to advance peace and this is something that I and the people of Israel will never give up on."

The meeting took place in the Lotte New York Palace Hotel where Obama is staying during the UN General Assembly session. Netanyahu praised Obama and thanked him for the military aid agreement, according to which Israel will receive $38 billion over 10 years for purchasing military equipment in the United States.

"The military aid deal fortifies Israel's security and makes sure it can defend itself by itself against any threat. Israel has no better friend than the U.S. and the U.S. has no better friend than Israel. It is an unbreakable bond based on common values and interests," said Netanyahu.

Obama too spoke about the military aid agreement "It is important for America's national security that we have a safe and secure Israel that can defend itself. The aid deal provides assurance that the cooperation between us will continue and it allows Israeli planners the kind of certainty at a moment of very little certainty in the region. We want Israel to have all the capabilities it needs," he said.

Netanyahu also remarked on the day after Obama leaves the White House, and told him that even after he completes his term in office he will remain an influential person whose voice will be listened to for decades: "I know you will continue to support Israel's right to defend itself and to live as a Jewish state. You will always be a welcome guest in Israel."