Israeli Prime Minister Benjamin Netanyahu started talks with U.S. Middle East envoy George Mitchell during a meeting in London on Wednesday. Speaking ahead of the bilateral meeting, Natanyahu said Israel was making progress toward reopening talks with the Palestines and hoped to be able to do so shortly. 'We are making headway. My government has taken steps both in words and deeds to move forward,' Natanyahu said. However, Palestinian Prime Minister Salam Fayyad said in Ramallah on Tuesday that a de facto state would be created in two years 'without waiting for the results of the peace negotiations with Israel.' The statehood would exist on territories Israel captured in the 1967 war, with East Jerusalem as its capital. On Tuesday, Netanyahu and his British counterpart Gordon Brown discussed Jewish settlements and Iran's nuclear program. Brown said he was 'more optimistic' about the prospects for peace in the Middle East, but considered continued Israeli settlement building on occupied land a barrier to negotiations. The Europeans have made clear their backing for the Palestinians and a U.S. demand for an immediate freeze of Israeli construction work in the West Bank. Israel is allegedly ready to offer a six-month building moratorium, while some Israeli reports suggest that the United States is looking for a two-year commitment. The peace talks have been stalled since Israel launched a military offensive in the Gaza Strip in December. The Palestinian Authority has repeatedly said peace talks with Israel can not resume until Netanyahu halts settlement activities and accepts the two-state solution. Over the past few months, the U.S. administration has been leading the international community in urging Israel to totally freeze settlement activities in the West Bank and East Jerusalem to help revive the Israeli-Palestinian peace process. 