WASHINGTON (Reuters) - Secretary of State Hillary Clinton said on Wednesday Israel’s plan to proceed with more settlement building was counterproductive to peace negotiations but thought a deal was still possible.

One day before she is due to meet visiting Israeli Prime Minister Benjamin Netanyahu in New York, Clinton announced the United States had given an additional $150 million to the Palestinian Authority as it readies itself for full statehood under a potential future peace agreement.

Clinton said the United States was working “every day, indeed every hour” to revive peace talks that began in Washington on September 2 but were suspended by the Palestinians three weeks later when Netanyahu refused to extend a 10-month limited building freeze in West Bank settlements.

“Each party has a very strong set of opinions about the way forward. There can be no progress until they actually come together and explore where areas of agreement are and how to narrow areas of disagreement,” Clinton said after a meeting with visiting Egyptian Foreign Minister Ahmed Aboul Gheit.

Clinton criticized Israel’s Monday announcement that it was moving ahead with a housing project in a part of the occupied West Bank that Israel annexed to Jerusalem 43 years ago.

“This announcement was counterproductive to our efforts to resume negotiations,” Clinton told reporters in an earlier appearance in Washington.

“We will continue to work to resume negotiations,” Clinton said. “We still believe that a positive outcome is both possible and necessary.”

Netanyahu told reporters in New York on Wednesday he planned to use the meeting with Clinton to discuss ways to achieve a peace agreement and downplayed friction over the settlement issue.

“We have broad understandings with the United States on this issue and many others that surmount the disagreements over other matters,” he said.

Diplomats have said Netanyahu hopes to finalize a package of incentives that could help him sell another partial construction moratorium to his governing coalition, which is dominated by pro-settler parties.

Netanyahu will focus on trying to forge a broad understanding on Israel’s security needs in any future peace agreement in light of the challenges it will face in coming years, Israeli political sources said.

Israel wants a long-term military presence in the Jordan Valley along the eastern boarder of a future Palestinian state, and Netanyahu has said that Israel would also need new U.S. aid to help finance other security changes brought about by any future peace agreement.

“STATE READY”

With negotiations stuck, Palestinians have stepped up pressure on the international community to formally recognize the Palestinian state -- a move the United States fears could further complicate the peace talks.

“We do not support unilateral steps by either party that could prejudge the outcome of such negotiations,” Clinton said on Wednesday.

Palestinian President Mahmoud Abbas has also asked for a U.N. Security Council meeting to discuss settlement building on occupied land, a Palestinian official said on Wednesday.

Aboul Gheit said Egypt, an influential voice in the Arab League, stood ready to help but was nevertheless concerned by the current deadlock.

“We feel that Israel is not doing what is required on the Israeli side,” he said after the Clinton meeting.

Clinton announced the new U.S. funding for the Palestinian Authority (PA) in a joint appearance with Palestinian Prime Minister Salam Fayyad, who said via video link that his aim remained to make the PA “state-ready” as soon as possible and financially independent by the end of 2013.

“Readiness for statehood is in fact the key objective,” Fayyad said. “We are well on track. we are determined to stay the course despite the difficulties and obstacles that we continue to have to contend with every day.”

The United States provided about $588 million to the PA in fiscal year 2010, and Wednesday’s $150 million pledge marked an early delivery of the first tranche of what U.S. officials say will be about the same level of aid for fiscal 2011.