* Skepticism about unblocking peace process
* Direct negotiations suspended since December
* Israel resisting call to stop building settlements
(Adds quotes and background)
By Matt Spetalnick
WASHINGTON, Oct 22 (Reuters) - The Obama administration pressed Israel and the Palestinians on Thursday to do more to help relaunch long-stalled peace talks after the latest flurry of U.S. diplomacy failed to yield any sign of a breakthrough.
Secretary of State Hillary Clinton handed President Barack Obama a less-than-glowing assessment of Middle East peace efforts amid skepticism inside and outside of the region about the prospects for unblocking the peace process.
Clinton's status report followed separate meetings in Washington in recent days between Obama's Middle East envoy George Mitchell and Israeli and Palestinian negotiators aimed at narrowing the gap and restarting direct negotiations suspended since December.
"The secretary advised the president that challenges remain as the United States continues to work with both sides," a senior administration official said after Clinton briefed Obama. "Both sides need to move forward toward direct negotiations."
Obama set Middle East peace as a top priority at the start of his presidency in January, in contrast to his predecessor George W. Bush, who was criticized internationally for neglecting the long-running conflict. But so far the new administration has little to show for its efforts.
The White House insisted progress had been made on some issues but again urged Israel to take tangible steps to stop building Jewish settlements and pushed the Palestinians to do more to meet their obligations.
"The Palestinians have strengthened their efforts on security and reforming Palestinian institutions, but they need to do more in these areas and on stopping incitement and preventing terror," the administration official said.
"Israelis have facilitated greater movement for Palestinians and responded to our call to stop all settlement activity by expressing a willingness to curtail settlement activity," the official said. "But they need to translate that willingness into real, meaningful action and do more to improve the daily lives of Palestinians."
ISRAEL RESISTS SETTLEMENT FREEZE
Israeli Prime Minister Benjamin Netanyahu, whose right-leaning coalition includes pro-settler parties, has resisted Obama's calls for a total freeze on settlements in the occupied West Bank.
Palestinian President Mahmoud Abbas, politically weak because he governs only in the West Bank while Hamas Islamists control the Gaza Strip, has said he will not resume direct talks until a complete settlement freeze is implemented.
Obama is sending Mitchell back to the region for a fresh attempt at restarting peace talks, and Clinton will consult with Arab foreign ministers on the subject in Morocco on Nov. 2-3, the administration official said.
Mitchell's previous rounds of shuttle diplomacy have failed to break the deadlock.
Obama's own direct engagement has also yielded scant movement. He managed to broker little more than an awkward handshake between Netanyahu and Abbas in New York last month. He then ordered aides to keep up diplomatic efforts and for Clinton to report back to him, as she did on Thursday.
Though the White House did little to raise expectations of a breakthrough, Israeli officials said progress had been with Mitchell on Israel's terms for restarting talks.
There was no sign, however, that Abbas was ready to drop his demand for a settlement freeze as a condition for resuming negotiations. Netanyahu has insisted he is ready for talks but that he will accept no preconditions. (Editing by Chris Wilson)