* Deal to free Israeli spy Jonathan Pollard mooted
* Israeli-Palestinian peace talks face April 29 deadline
* Kerry meeting Israeli and Palestinian leaders (Adds conclusion of Netanyahu talks, changes in Abbas meeting)
By Lesley Wroughton and Jeffrey Heller
JERUSALEM, March 31 (Reuters) - U.S. Secretary of State John Kerry rushed back to the Middle East on Monday to try to salvage stalled peace talks, possibly by releasing an Israeli spy jailed in the United States to push Israel to free Palestinian prisoners.
Requesting anonymity, a U.S. official said the release of Jonathan Pollard, who is serving a life sentence in the United States for spying for Israel, was "on the table" as a possible element in a Middle East peace deal as an incentive to Israel.
Kerry, who flew to Israel from Paris, held two-hour talks in Jerusalem with Israeli Prime Minister Benjamin Netanyahu.
A senior State Department official said due to the late hour, Kerry would not meet Palestinian President Mahmoud Abbas in Ramallah, in the occupied West Bank, as planned on Monday. Instead, he was expected to meet Palestinian negotiator Saeb Erekat and Majeb Faraj, the Palestinian intelligence chief, in Jerusalem.
The focus of Kerry's mission appeared to have shifted from reaching an elusive framework agreement by April 29, including general principles for a final peace accord, to simply keeping both sides talking beyond the previously set deadline and creating conditions for that to happen.
State Department spokeswoman Jen Psaki, who denied reports last week that Pollard - a former U.S. Navy analyst arrested in 1985 - might go free, gave a less emphatic response when asked about the latest prospects for his release.
"Jonathan Pollard was convicted of espionage and is serving his sentence. I do not have any update for you on his status," she said.
White House spokesman Jay Carney gave an almost identical response to reporters when asked about Pollard.
U.S. intelligence agencies have long opposed any early release of Pollard, who pleaded guilty in 1987 to charges of spying for Israel. There was no immediate Palestinian comment on the proposal.
A major stumbling block in the peace negotiations, which resumed in July after a three-year break, is Netanyahu's demand that Abbas explicitly recognise Israel as a Jewish state. He has refused, saying that would destroy the Palestinians' own narrative for nationhood.
The negotiations, which have shown little sign of progress, faced a crisis at the weekend when Israel failed to press ahead with a promised release of several dozen Palestinian prisoners.
Israeli officials said the Palestinian leadership first had to commit to continuing the negotiations beyond next month's target date for a final land-for-peace agreement.
Sources close to the talks, who declined to be identified, said that under the proposed arrangement to extend the negotiations beyond April, Pollard would be freed before the Jewish holiday of Passover, which begins in two weeks.
Israel, they said, would go ahead with the promised release of a fourth group of Palestinians, the last among the 104 it pledged to free under a deal that led to the renewal of the talks eight months ago.
In addition, another group of jailed Palestinians - none of them convicted of killing Israelis - would be freed. Some of Netanyahu's far-right partners in his governing coalition have come out against any wider release, but Pollard's freedom could mute their opposition.
LONG SERIES OF APPEALS
Israeli prime ministers have long appealed to U.S. presidents to pardon Pollard, now 59. Netanyahu said he raised Pollard's case in his White House meeting with President Barack Obama on March 3.
Many Israelis believe Pollard, an American Jew granted Israeli citizenship in the 1990s, received a punishment that did not fit his crime. He has been kept in prison longer than other spies convicted in the United States and is due for parole next year.
Kerry, faced with the possible collapse of the most ambitious U.S. bid in years to achieve a peace deal leading to the creation of a Palestinian state, interrupted a visit to Rome last week to go to Amman, Jordan, for talks with Abbas.
He is due in Brussels on Tuesday and Wednesday for a NATO ministerial meeting that will focus on Ukraine and Afghanistan.
Officials have said Israel and the Palestinians remain far apart even on a draft framework. However, the State Department's Psaki said on Monday the Israelis and Palestinians "have both made tough choices" over the past eight months.
"As we work with them to determine the next steps, it is important they remember that only peace will bring the Israeli and Palestinian people both the security and economic prosperity they all deserve," she said. (Writing by Jeffrey Heller; Reporting by Lesley Wroughton, Jeffrey Heller and Allyn Fisher-Ilan in Jerusalem and Mark Hosenball, Jeff Mason and Matt Spetalnick in Washington; Editing by Tom Heneghan and Dan Grebler)
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