(Adds comments by Barak and Egyptian intelligence chief)

By Dan Williams

SHARM EL-SHEIKH, Egypt, Dec 26 (Reuters) - Egypt rejected Israeli complaints about weapons smuggling into Gaza on Wednesday, after talks between Egyptian President Hosni Mubarak and Israeli Defence Minister Ehud Barak.

Egypt also accused Israel of trying to distract attention from its building activities at Jewish settlements.

After the talks an Egyptian spokesman said Israeli actions had undone the achievements of last month's peace conference in Annapolis in the United States.

Barak came to Egypt on Wednesday to discuss Israeli allegations that Egypt was doing too little to prevent arms smuggling to the Islamist movement Hamas in the Gaza Strip.

He met Egyptian Defence Minister Mohamed Hussein Tantawi, intelligence chief Omar Suleiman and then Mubarak.

Barak told reporters: "We raised our concerns (on border security)... Dialogue will continue between us."

But Egyptian presidential spokesman Suleiman Awad said Israel's charges were "a smokescreen to shift attention from settlement construction and the follow-up on Annapolis".

"We are exerting 100 percent effort but cannot guarantee 100 percent results. No state can totally seal off its border."

Proposals to build new homes for Jews near Jerusalem "undermine the only achievement of the Annapolis meeting -- that is the launch of negotiations", Awad added.

"We check everything, we confiscate anything that comes from the Suez Canal all the way to the border, but it is not easy," intelligence chief Suleiman told Reuters.

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The settlement question has been the main immediate obstacle in Israeli-Palestinian talks this month. The Palestinian side argues that building plans violate the peace "road map".

Israeli Foreign Minister Tzipi Livni said on Tuesday that Egypt's efforts to prevent arms smuggling into Gaza were "terrible" and risked strengthening Hamas over Fatah, which is backed by Western nations and Israel.

Egypt has asked Israel to let it deploy more guards on the Egypt-Gaza border but the Israelis have said the number is not the problem. The number was fixed in their 1979 peace treaty and adjusted when Israel withdrew from the Gaza Strip in 2005.

"Egypt is a country of 72 million people, and they (the authorities) maintain absolute quiet. We expect the same on the Gaza border," senior Barak aide Amos Gilad told reporters.

Egypt accused Israel earlier on Wednesday of encouraging pro-Israeli groups in the United States to lobby members of the U.S. Congress to the detriment of Egyptian interests.

Barak replied: "We do not push anything in the Congress, but of course our relationship is very close and we answer when we are asked questions."

Two U.S. lawmakers on key congressional panels said in Jerusalem on Wednesday the United States could make future aid to Egypt conditional on Cairo doing more to halt the smuggling.

Republican Senator Arlen Specter of Pennsylvania and Democratic Representative Patrick Kennedy of Rhode Island threatened to use their seats on the powerful appropriations committees to increase pressure on Egypt.

As Barak arrived, a security source said Egyptian police had found 500 kg (1,100 lb) of TNT in a house at Rafah on the Egyptian side of the Gaza border and had arrested the Egyptian owner. (Writing by Jonathan Wright and Ari Rabinovitch, editing by Richard Meares)

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