July 7 (Reuters) -U.S. Middle East envoy George Mitchell is pressing for a halt to Israeli settlement activity, holding out the prospect of reciprocal steps by Arab states towards normalising relations with Israel.

Talks in London on Monday between Mitchell and Israeli Defence Minister Ehud Barak on a package that could include a settlement freeze and normalisation ended inconclusively.

Further discussions are planned between Mitchell and Israeli Prime Minister Benjamin Netanyahu as early as next week.

Egypt and Jordan are the only Arab states that have diplomatic relations with Israel. Below are the regional normalisation steps U.S. and Western officials say Washington is seeking:

- Arab countries in the Gulf would allow Israeli passenger and civilian cargo aircraft to fly over their territory. The move would save long detours on flights to Asia, a popular destination for Israeli travellers.

- Israel would be able to open interest sections in other states' embassies in Arab capitals, such as Riyadh and Abu Dhabi. Israel had interest sections in several Arab countries but they were closed after the start in 2000 of a Palestinian uprising in the West Bank and Gaza Strip.

- Arab countries would lift bans on the entry of tourists and other visitors whose passports carry Israeli visas or entry stamps. Such a step would facilitate regional travel for tourists and business executives.

- Arab states would allow Israeli-registered mobile phones to operate on Arab networks, a move that could foster economic contacts.

- Israel and Arab states would hold cultural exchanges. Arab countries would ease restrictions that prevent their officials from meeting with Israeli counterparts at international events.

A senior Israeli official familiar with Mitchell's talks said Israel was sceptical the envoy would be able to coax Arab states to make concrete normalisation commitments if only a temporary settlement freeze was declared.

"Even if the Americans can bring a serious settlement freeze, the normalisation steps will be implemented only gradually and based on performance by Israel," the official said.

(Reporting by Adam Entous in Jerusalem and Arshad Mohammed in Washington; Editing by Jeffrey Heller and Sophie Hares)

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