* Netanyahu says Israel must be 'smart' on settlements
* Hints at limiting expansion to areas Israel wants to keep
* Palestinians want total freeze in construction
Prime Minister Benjamin Netanyahu hinted on Monday that Israel was ready to confine Jewish settlement expansion to the blocs of occupied territory it wants to keep under any peace deal with the Palestinians, in a nod to U.S. efforts to revive stalled negotiations.
Settlement construction was cited as a key reason for the breakdown of U.S.-sponsored peace talks in 2010, and a stumbling block to Secretary of State John Kerry's latest efforts to revive negotiations towards founding a Palestinian state in land Israel captured in the 1967 Middle East war.
Netanyahu told Parliament's Foreign Affairs and Defence Committee that he wanted to resume peace talks, but that construction in the settlements in the West Bank would continue, "and continues today".
He added, though, that "we have to be smart about it, not just correct".
"Settlement in the blocs wouldn't substantively change the ability to reach an agreement," he said, referring to several clusters of enclaves where a majority of settlers live.
Netanyahu spoke behind closed doors and officials released some of his remarks in a statement issued later to reporters.
Israel has long said that under any peace agreement it intends to keep its largest settler enclaves built in Ariel, near the Palestinian city of Nablus, in Gush Etzion in the Bethlehem area, and in the Jerusalem area.
Palestinian President Mahmoud Abbas has so far linked a resumption of peace talks to a total freeze in settlement construction, which Palestinians see as establishing facts on the ground that deny them land they need for a viable state.
One of Netanyahu's senior political partners, member of parliament Avigdor Lieberman, told Army Radio Israel was already observing a break in construction in East Jerusalem.
"One should view this as a temporary hiatus," the former foreign minister said. He added: "We have an interest in Kerry succeeding."
Israel captured East Jerusalem in the same war in which it took the West Bank, but annexed the city as part of its capital in a move never recognised internationally. Palestinians want East Jerusalem to be capital of their future state.
Since taking office in February, Kerry has visited Israel and the Palestinian territories four times in his drive to win the agreement of the sides to renew negotiations.