President George W. Bush said Wednesday that Israel's construction of a West Bank security barrier is a hurdle in the Middle East process that his administration wants to overcome.

The United States wants the barrier, which has caused new tensions with Palestinians, to be rerouted and is considering financial sanctions against Israel, according to officials.

"We're talking to Israel about all aspects of the fence," Bush, who is vacationing at his ranch here, told reporters. "I made it clear, I thought the fence was a problem. And so we're talking with them."

"We will continue to work on this issue, as well as other issues," Bush said, flanked by Secretary of State Colin Powell who was paying him a visit.

"I do believe we're making progress," added the president.

"The key for a peace to happen is for both parties to assume their necessary obligations and responsibilities, to create the conditions so that people have confidence that people know their lives will be safe and that prosperity can break out."

When Palestinian Prime Minister Mahmud Abbas visited the White House on July 23, Bush said that the barrier was a problem and that he had been talking with Israel's Prime Minister Ariel Sharon.

Bush dropped the term four days later, however, when Sharon was in Washington. The US president said he hoped the barrier would become obsolete in the long term if peace could be achieved.

Palestinian leaders have said the barrier is an attempt to set out the frontier of a new Palestinian state before talks have even started.

The Israeli prime minister has insisted construction would continue. But with time now pressing in

the campaign to get down the roadmap to Middle East peace and create a Palestinian state by 2005, the US administration is considering financial sanctions against Israel.

The State Department said Tuesday that construction of the controversial security barrier may result in US financial sanctions.

A proposal under discussion would withhold US loan guarantees to the amount Israel spends on sections of the barrier in built Palestinian territory east of the 1967 Green Line division between Israel and the West Bank.

A White House spokesman emphasised however that no decision had been taken.

Bush was adamant Wednesday that the Middle East peace process was making progress following a series of meetings between the Israeli and Palestinian leaders and others with the US president.