Israeli Prime Minister Benjamin Netanyahu said Sunday he is willing to reach an historic compromise with the Palestinians, “so long as it maintains the national interests of the State of Israel with security first and foremost.”

Speaking at the weekly political-security cabinet meeting in Jerusalem, in which he debriefed his ministers on the direct peace talks held in Washington, Netanyahu said that Israel and the Palestinian National Authority (PNA) would have to jointly devise new and original solutions for thorny issues between the sides.

The Israeli premier said he believed that there is a “sense of readiness in the Arab world that this is the time to try and complete a peace settlement.”

Chief Palestinian negotiator Saeb Erekat told Israeli Army Radio on Friday that the final-status issues up for discussion include Jerusalem, borders, refugees, settlements, water and security.

The report also claimed that Abbas had presented Netanyahu with points agreed on two years ago with former Israeli Prime Minister Ehud Olmert, and that the two leaders agreed in principle on security issues and borders.

Israeli officials declined to comment on whether Netanyahu did discuss points approved by his predecessor and other questions, and said that the U.S. administration has demanded that no information regarding the talks is leaked to the press.

“In order to succeed this time, we must draw lessons from 17 years of negotiations and embrace original thinking, to think outside the box as it were. We will need to think creatively and in new ways about how to resolve complex problems and reach practical solutions outside the box in order to reach practical solutions. I believe that this is possible,” Netanyahu said.

“It’s time to move forward towards peace with the Palestinians and expand it into a broader cycle of peace,” Netanyahu said, adding that “this sense stems both from an understanding of the significance of the alternatives and from the recognition that they (the Arab states) simply must make peace with Israel.”

According to recent news reports, Netanyahu and PNA President Mahmoud Abbas returned from the peace summit in high spirits and optimistic about the potential success of the direct peace talks, which are slated to be completed by the end of 2011. This optimism is reportedly shared by the Arab leaders who accompanied the talks and American officials.

U.S. President Barack Obama is reported to have been “very pleased” with the outcome of the summit and to plan to personally intervene in the direct negotiations in order to move the peace process forward, a senior U.S. official told local daily Ha’aretz over the weekend.

“Obama cleared his entire schedule last Wednesday to devote himself to the summit. He never invested in any other issue this way,” the official was quoted by the newspaper as saying on Sunday.

The London-based newspaper Al-Hayat Sunday quoted aides to Abbas as saying that the atmosphere in the Palestinian delegation to the direct talks had “taken a 180-degree turn” for the better. Palestinian negotiators were pleased that the U.S. was planning to include all the core issues in a final-status agreement to be finalized by the end of 2011.

Erekat and his Israeli counterpart, attorney Yitzhak Molcho, are slated to meet Monday in Jericho for a preparatory meeting, according to unconfirmed media reports.

The second round of talks between Netanyahu and Abbas following the Washington peace summit is scheduled to be held on Sept. 14 at the Egyptian resort town of Sharm el-Sheikh and will be attended by U.S. Secretary of State Hilary Clinton and special Middle East envoy George Mitchell.

Netanyahu and Abbas will discuss borders and security arrangements at the day-long talks. They will meet once again the following day in Jerusalem and Ramallah.

Meanwhile, Netanyahu’s decision in regard to the settlement construction freeze, due to expire on Sept. 26, remains unknown.

The Israeli premier refrained from discussing the issue of the construction moratorium in last week’s peace summit as well as in his address to the cabinet ministers on Sunday. But in a meeting he held with Likud ministers earlier in the day, he clarified that the dilemma of whether or not to extend the moratorium remains a problem.

Netanyahu is currently under heat from his government’s right- wing coalition partners to continue building in Jewish settlements in the West Bank. Vice Premier Silvan Shalom demanded that Netanyahu hold a cabinet meeting on the issue prior to continuing the direct talks in Sharm el-Sheikh.

The Palestinian leadership has made it clear in recent weeks that they would quit the talks if Israeli West Bank construction activity resumes.

In an attempt to find a solution to the construction freeze issue, Netanyahu is planning to offer the Palestinians generous gestures in exchange for their agreement to proceed with the peace talks while allowing Israel to continue building, local daily Ma’ ariv reported on Sunday.

According to the report, Israeli Ambassador to the U.S. Michael Oren told Jewish leaders in a video conference on Friday that Netanyahu is set to offer Abbas several perks, including the release of hundreds of Palestinians jailed in Israel, cancelling army checkpoints in the West Bank and full Palestinian control of a road that will link Ramallah with Rawabi, a new Palestinian town now under construction.

“We know Abbas’ position can be unstable at times, and we’re trying to find ways to keep him at the negotiation table,” Oren was quoted as saying.

“After we pass this hurdle, we’ll be able to quickly proceed towards attaining a historical framework agreement,” he said.