An official in Washington says urgent diplomatic efforts are underway to rescue Israeli-Palestinian peace talks hours before a West Bank settlement construction slowdown expires.

Palestinians have threatened to walk out of the talks if the construction resumes. President Barack Obama restarted the negotiations this month after weeks of shuttle diplomacy.

Israeli settlers were already celebrating the end of the 10-month slowdown, set to expire at midnight Israel time, as diplomats searched for a compromise.

A U.S. official said talks among the U.S., Israeli and the Palestinians were taking place Sunday.

"They are talking. Intense efforts are ongoing," the official said, speaking on condition of anonymity because of the sensitivity of the contacts.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

REVAVA, West Bank (AP) _ Dozens of Jewish settlers broke ground on a new daycare center deep inside the West Bank Sunday to celebrate the end of the government's 10-month-old construction slowdown at midnight _ symbolically renewing settlement activity that threatens to derail peace talks with the Palestinians.

Some 2,000 people headed to another nearby settlement for a larger rally, where activists released 2,000 blue and white balloons _ the colors of the Israeli flag _ into the air at sundown. The balloons were meant to symbolize the 2,000 apartments that settlers say they are ready to be built immediately.

"Today it's over and we will do everything we can to make sure it never happens again," settler leader Dani Dayan told the crowd. "We return with new energy and a new determination to populate this land."

The festivities went ahead despite Israeli Prime Minister Benjamin Netanyahu's call for the settlers to show "restraint" as the curbs are lifted. His call showed concern about the strains that renewed building on lands Palestinians claim for a future state could place on negotiations launched early this month by the Obama administration.

The deadlock over settlements has created the first major crisis in the negotiations, and efforts to resolve the standoff appeared to be going down to the last minute as U.S. mediators raced to bridge the gap between the Israelis and Palestinians. But a deal was far from certain.

The Palestinians, opposed to all settlements built on territories they claim for a future state, have said they will quit negotiations if Israel resumes building, though President Mahmoud Abbas said in a published interview Sunday he would not immediately withdraw. Instead, he said he would consult with Arab partners to weigh his options.

Netanyahu, under pressure from pro-settler hard-liners in his governing coalition, has said he will not extend the slowdown on construction he imposed exactly 10 months ago. The curbs, which expire at midnight, prevented new housing starts in the West Bank, though the government allowed thousands of units already under construction to be finished. A similar, but undeclared, slowdown has also been in place in east Jerusalem, the area of the holy city claimed by the Palestinians.

Netanyahu was huddling with top officials late Sunday in hopes of finding a way out of the impasse. He has already signaled that even after the slowdown officially ends at midnight, future settlement construction will be kept to a minimum, in contrast to relatively unfettered housing activity of past Israeli governments.

Netanyahu called on settlers "to show restraint and responsibility today and in the future _ just as they showed restraint and responsibility during all 10 months of the new construction suspension." He also instructed his Cabinet ministers not to speak to the media.

The settlers did not seem to heed the call for restraint. Several dozen people attended Sunday's groundbreaking ceremony for a new kindergarten in the Kiryat Netafim settlement.

"For 10 months, you have been treated as second class citizens," said Danny Danon, a pro-settler lawmaker in Netanyahu's Likud Party, at the rally at Revava in the West Bank. "Today, we return to build in all the Land of Israel."

In Revava, a settlement of about 130 Orthodox Jewish families in the rocky hills of the northern West Bank, the crowd included young activists, men wearing trademark knit skullcaps favored by religious settlers and foreign supporters from Norway and China.

Netanyahu imposed the slowdown last November in a bid to draw the Palestinians back to the negotiating table.

The Palestinians initially rejected the offer as insufficient because it contained loopholes that allowed thousands of West Bank apartments to be built. But in recent weeks they have said the measures must remain in place if they are to continue negotiations.

The Palestinians oppose all Israeli construction in the West Bank, saying it cripples plans for a viable Palestinian state. Some 300,000 Israelis live in West Bank settlements, scattered among 2.5 million Palestinians. Another 180,000 Israelis live in east Jerusalem, the section of the holy city claimed by the Palestinians.

In practice, the slowdown has brought about only a slight drop of about 10 percent in ongoing construction. But it has significantly cut new housing starts _ by about 50 percent, according to the dovish Israeli group Peace Now, meaning it could have far more impact if the restrictions remain in place.

In a television interview, settler leader Dayan acknowledged it would take some time for work to really begin.

"Whoever thinks that tomorrow there will be some kind of earthquake and there will be bulldozers wherever you look is wrong, that is not going to happen. It's a process and takes a while," he said.

U.S. Secretary of State Hillary Clinton held talks with senior Israeli and Palestinian officials over the weekend in hopes of forging a deal.

Before boarding a plane back to Israel, Israeli Defense Minister Ehud Barak told the BBC late Sunday that chances of success were "fifty-fifty." The chief Israeli and Palestinian negotiators remained in the U.S., leaving a window open for a last-minute agreement.

One of Obama's chief advisers, David Axelrod, told ABC News that efforts were continuing.

"We're very eager to keep these talks going," he said. "We are going to urge and urge and push throughout this day to _ to get some kind of resolution."

Despite the tensions, there have been signs of compromise. Senior Palestinian officials told The Associated Press last week they were prepared to show "some flexibility."

In an interview published Sunday in the pan-Arabic daily al-Hayat, Abbas said he would not immediately withdraw from peace talks if construction resumes. Instead, he said he would convene the Palestine Liberation Organization and the Arab League to formulate a joint response.

Abbas ruled out a violent response.

"We won't go back to that again," he said.

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Associated Press writers Matti Friedman and Dalia Nammari in Jerusalem contributed to this report.