(Adds Netanyahu comments, U.S. official's remarks, context in paragraphs 3, 12-13 and 16-18)
By Jeffrey Heller and Matt Spetalnick
WASHINGTON, March 4 (Reuters) - Israeli Prime Minister Benjamin Netanyahu warned the United States and other world powers on Tuesday not to allow Iran to retain the ability to enrich uranium, and urged Palestinians to recognize Israel as a Jewish state if they wanted peace.
Addressing the pro-Israel lobby AIPAC just a day after White House talks, Netanyahu avoided any explicit criticism of President Barack Obama but underscored the main differences with him over U.S.-led nuclear diplomacy with Iran.
With Netanyahu facing pressure to meet looming deadlines for salvaging a U.S.-brokered Middle East peace effort, he insisted he was prepared to make "historic peace" with the Palestinians but offered no concessions. Obama pressed him in private on Monday to help bridge differences in "the next several weeks," a U.S. official said.
Netanyahu reiterated his firm opposition to the possibility that a final deal to curb Iran's disputed nuclear program would allow it to keep some technologies with bomb-making potential.
All of these must be dismantled, he said, adding that pressure on Tehran should be increased. That is the reverse of a modest easing of sanctions Iran received under an interim accord with the United States and five other world powers in November.
"Unfortunately the leading powers of the world are talking about leaving Iran with the capability to enrich uranium. I hope they don't do that, because that would be a grave error. It would leave Iran as a threshold nuclear power," he said.
In a pledge that signaled both willingness to strike Iran's nuclear sites as a last resort and refusal to yield on core peace terms with the Palestinians, Netanyahu told a cheering audience: "I will do whatever I must to defend the Jewish state of Israel."
But the hawkish Israeli leader, who has been accused of trying to scuttle the Iran negotiations, stopped short of issuing any direct threat against the Islamic Republic, Israel's arch foe. Iran denies seeking nuclear weapons. Israel is widely believed to have the region's sole atomic arsenal.
Netanyahu's combative remarks followed talks in which he told Obama that he would never compromise on Israel's security even as the U.S. leader sought to reassure him on Iran nuclear diplomacy and pressure him on Middle East peace talks. There was no sign of significant progress from Monday's meeting.
'STOP DENYING HISTORY'
Turning to the Palestinians, with whom Israel renewed peace talks in July under U.S. auspices, Netanyahu said he wanted an accord. But he put the onus on Palestinians to recognize Israel as a Jewish state - something they have long refused to do.
"It's time the Palestinians stop denying history. Just as Israel is prepared to recognize a Palestinian state, the Palestinians must be prepared to recognize a Jewish state," Netanyahu said.
At the same time, Netanyahu made the case for a peace dividend for Israel and hostile Arab neighbors, saying peace could lead to prosperity across the region - an economic argument that could soften opposition from Israeli hardliners if a tentative deal is struck with the Palestinians.
"This is one of the first times he has made an affirmative case for a peace deal, which we thought was very positive," the Obama administration official said.
Palestinian President Mahmoud Abbas says Israeli settlement construction in the occupied West Bank and East Jerusalem is the main obstacle to a deal to create a Palestinian state.
Obama on Monday urged Netanyahu to make "tough decisions" to help work out a framework document with the Palestinians that would extend talks beyond April. Secretary of State John Kerry has set a late April target for an elusive final accord he is trying to clinch.
There is a U.S. push to finalize the document, which would be non-binding and allow both sides to state their reservations, ahead of a scheduled Israeli release of another group of Palestinian prisoners at the end of March.
In Monday's White House talks, Obama underscored that the framework, which was the main focus of the meeting, was "very good" for Israel, and told Netanyahu he would push just as hard for progress when he meets Abbas at the White House on March 17, the U.S. official said.
Netanyahu insisted publicly on Monday that Israel was already doing all it could. Both sides have expressed skepticism about chances for success.
Netanyahu received a warmer reception on Tuesday at the annual convention of the American Israel Public Affairs Committee, a venue for some of his most strident speeches.
Though the group's influence remains strong, it is trying to show it has not lost its touch after the White House blocked its push for Congress to approve new Iran sanctions. Obama says any new measures would derail diplomacy.
Taking the podium before Netanyahu, Senator Robert Menendez said he still sees his proposal to impose new sanctions as the best way to ensure Iran does not develop a nuclear weapon, but he offered no timetable for reviving such a bill.
While Netanyahu's speech broke little new ground, he also used his appearance to condemn pro-Palestinian activists abroad who are campaigning to isolate Israel with a "boycott, divestment and sanctions" movement, or BDS.
"Everyone should know what the letters BDS really stand for: bigotry, dishonesty and shame," he said. The movement has made some inroads in Europe but had little U.S. impact. (Additional reporting by Patricia Zengerle and Will Dunham; Editing by Crispian Balmer, Bernadette Baum and Mohammad Zargham)
At AIPAC, Netanyahu Warns On Iran, Urges Palestinians To Recognize Israel As Jewish State