New York - After a day of sharp exchanges over the Middle East peace process and Iran's role in the region, world powers on Friday urged Israeli and Palestinian leaders to reach a final peace deal by the end of the year.

US Secretary of State Condoleezza Rice said she still believed a comprehensive agreement on a two-state solution was possible by the end of 2008, a goal first set in November 2007 at a US-hosted summit in Annapolis, Maryland.

Rice said the fact there was a process represented a change from the seven years of silence before Annapolis. Both sides had "come quite a long way from those dark days."

The Middle East quartet charged with overseeing the Israeli- Palestinian peace process voiced confidence in the "meaningful and results-oriented" talks, in a statement after a meeting at the United Nations in New York.

The quartet, made up of the United Nations, United States, European Union and Russia, called on both sides to "continue to make every effort to conclude an agreement before the end of 2008."

Quartet representatives were invited by the Israelis and Palestinians to travel to the region before the end of 2008 to gauge the progress of the talks. UN Secretary General Ban Ki-moon said the group would welcome a chance to be briefed from the region.

The cautious optimism came as Arab leaders said that peace talks were failing because of ongoing Israeli settlement building. Arab League Secretary General Amr Mussa said the settlement activity "has killed Annapolis."

Palestinian President Mahmoud Abbas called it the "main obstacle" to achieving a two-state solution in the region. He said the patchwork of settlements made it near impossible to create a viable Palestinian state.

Israel's UN ambassador Gabriela Shalev denied the charges and criticized the Security Council for ignoring threats posed by the militant Islamic group Hamas, which controls the Gaza Strip, and the repeated threats against Israel from Iran.

She acknowledged that settlements were a "sensitive issue" but not the "principle and singular" obstacle to peace in the region.

There was widespread condemnation of Israeli settlement building in a meeting of the Security Council. The session, called by Saudi Arabia, was intended to exclusively discuss ongoing Israeli settlement activity but turned into a wider discussion of the peace process.

Western powers used the meeting to sharply criticize Iran's recent threats against Israel's existence.

Abbas, who appeared Friday before the UN General Assembly and Security Council, said that the Palestinian Authority would strive to achieve the "maximum progress possible" in talks with Israel this year.

Israeli President Shimon Perez said Wednesday that he didn't expect a final resolution until 2009.

The quartet statement called on Israel to freeze all settlement activity and dismantle those settlements built after March 2001. It condemned terrorist attacks against Israelis and ongoing rocket fire coming out of the Palestinian territories.

French Foreign Minister Bernard Kouchner called the settlements "illegal under international law" but praised the wider peace talks being held by the Israelis and Palestinians. He said the talks had continued despite the best efforts of "extremists" and called on the Palestinian Authority to continue combatting terrorism.

Rice said it was a sign of the two sides' commitment that Israeli Foreign Minister Tzipi Livni met with her Palestinian counterpart this week, one day after Livni was charged with forming her own government due to Prime Minister Ehud Olmert's resignation.

Rice angrily chided the Security Council for not condemning Iranian President Mahmoud Ahmadinejad's fresh threats issued against Israel during his speech earlier this week to the UN General Assembly.

"The United States will be asking the council to convene again to take up the matter of one member of the United Nations calling for the destruction of another member of the United Nations in a way that simply should not be allowed," Rice said.

British Foreign Secretary David Miliband said he was "truly sorry the council could not find unity in the denunciation of (Ahmadinejad's) remarks." (dpa)