(BRUSSELS) - EU foreign policy chief Javier Solana expressed hope Tuesday that Israel and the Palestinians could reach a peace settlement this year, after their leaders met for the first time in almost two months.

"Politically, an important meeting took place yesterday," he told members of the European Parliament, a day after Israeli Prime Minister Ehud Olmert and Palestinian president Mahmud Abbas held direct talks in Jerusalem.

"I do think that we have still a chance to move the process to a settlement before the end of year 2008," Solana said, underlining: "I don't want to sound too optimistic, I want to sound realistic."

He said that "the situation in Gaza is more relaxed than it used to be" and that he hoped a "period of quietness" would descend on Gaza, with the help notably of Egypt.

Israel has sealed off Gaza from all but vital goods since Hamas seized power last June, in a bid to halt rocket attacks from the territory and to put pressure on the Islamist-run government.

But Solana said the future would become clearer in the summer.

If "we are not able to move the process in a dynamic manner by this period of time, maybe we'll have to begin to think that the possiblity of an agreement in the year 2008 will be further away," he said.

Olmert and Abbas agreed Monday "to continue with the goal of reaching an historic agreement by the end of the year," an Israeli spokesman said, despite accusing each other of failing to meet commitments under a peace roadmap.

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