After talks with his Israeli counterpart Avigdor Lieberman, Westerwelle said the Palestinians needed improved economic prospects if peace talks were to stand a chance.

"We want to strengthen moderate Palestinian forces, and to do that we need better economic development," he told reporters.

"That is why I called for exports from the Gaza Strip to be permitted and made concrete proposals to my counterpart," Westerwelle added without elaborating.

Westerwelle, who is also Germany's vice chancellor, is on Monday to visit Gaza which is controlled by the Islamist movement Hamas.

He is to meet business leaders and representatives of the UN agency for Palestinian refugees, visit a school and inaugurate construction on a badly needed sewage treatment plant, for which Germany is providing 20 million euros (28 million dollars) in funding.

He will not meet Hamas officials.

Lieberman said Israel was not convinced of any international demand for exports from Gaza.

"I'm not sure that there is place on the market," he said, despite what he called a successful programme for strawberry and flower exports to the Netherlands.

But in what Westerwelle called a "breakthrough," Lieberman said he expected progress "within two or three weeks" on the practical concerns holding up the construction of the Gaza sewage plant, near the Israeli border.

In early July, Israel gave the go-ahead for the international community to import construction materials into the Gaza Strip provided it supervises the projects for which they are used.

The move followed intense international pressure after a deadly Israeli raid in May on a fleet of aid ships bound for Gaza.

A blanket ban on importing building materials had stifled reconstruction in the Gaza Strip since Israel's devastating 22-day offensive, which ended in January 2009.

Although almost all civilian goods are now allowed into the territory, where most of the 1.5-million population relies on foreign aid, Israel's new regulations do not allow exports from Gaza.

On the floundering peace process, Westerwelle said the region could not afford "gridlock" and renewed a European call for Israel to halt settlement construction in the occupied West Bank.

US President Barack Obama relaunched direct negotiations between Israel and the Palestinians at the start of September.

But they ran aground just three weeks later, with Abbas refusing to attend talks unless Israel renewed a moratorium on settlement building.

Westerwelle, on his second trip to Israel and the Palestinian territories since taking office a year ago, also met with President Shimon Peres and the family of captured Israeli soldier Gilad Shalit.

He called for Shalit's immediate release after more than four years being held in a secret location but declined to comment on reported German efforts to secure his liberation.

Hamas and other Palestinian groups captured Shalit in a deadly cross-border raid from Gaza in June 2006 and have demanded hundreds of Palestinian prisoners, including top militants, in exchange for his release.

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