Israelis and Palestinians resumed direct talks for the first time in three years on Monday, with the United States urging negotiators to make tough compromises to reach a peace deal.

Israeli chief negotiator Tzipi Livni and her Palestinian counterpart Saeb Erakat sat side-by-side opposite top US diplomat John Kerry to share a traditional Muslim iftar meal.

In the elegant Thomas Jefferson room at the State Department, Kerry welcome the two negotiating teams to a flower-bedecked table and hailed the dinner as "very, very special."

"There's not very much to talk about at all," he joked, seeking to break the ice at a landmark moment that many hope may lead to a long-sought breakthrough in the deadlocked peace process.

The new US secretary of state, who has staked much of his reputation on bringing both sides back to the talks, first met with the teams separately.

He will also host a three-way meeting on Tuesday, before making a statement to reporters around 11:00 am (1500 GMT), accompanied by the two negotiators.

Kerry was flanked at the dinner by seasoned diplomat Martin Indyk, who he named earlier as the US special envoy to the talks, and by White House Middle East advisor Phil Gordon.

President Barack Obama has welcomed the start of the talks, calling the, a "promising step" forward but warning of "hard choices" ahead.

"The most difficult work of these negotiations is ahead, and I am hopeful that both the Israelis and Palestinians will approach these talks in good faith," he said.

Obama promised the United States is ready to support both sides "with the goal of achieving two states, living side by side in peace and security."

Kerry also warned that "many difficult choices lie ahead for the negotiators and for the leaders as we seek reasonable compromises on tough, complicated, emotional and symbolic issues.

"I think reasonable compromise has to be a keystone of all of this effort."

The two sides have agreed to continue talking for at least nine months, a State Department official said.

"We're going to make every effort to reach an agreement within that time frame, but... if we're making progress and we're continuing to make progress, this is not a deadline," spokeswoman Jen Psaki said.

Indyk, 62, who has twice served as US ambassador to Israel and participated in the failed Camp David summit in 2000 under then president Bill Clinton, said he was taking on "a daunting and humbling" challenge.

But he insisted: "It has been my conviction for 40 years that peace is possible."

The last direct talks collapsed in September 2010 amid continued Israeli settlement building.

Israel and the Palestinians remain deeply divided over so-called "final status issues."

These include the fate of Jerusalem, claimed by both as a capital, the right of return for Palestinian refugees, the borders of a future Palestinian state and the fate of dozens of Jewish settlements scattered across the occupied West Bank.

Earlier this month, on his sixth trip to the region in six months of dogged diplomacy, Kerry wrested an accord setting out the basis for new negotiations from both sides.

Livni, speaking earlier after meeting UN chief Ban Ki-moon in New York, said the path ahead was "going to be very tough and problematic."

"The meeting is to define what will come next in the negotiations," senior Palestinian official Hanan Ashrawi told AFP.

"There must be a timeline and commitment from both sides on what they'll agree about. We hope for something good."

As a first step, Israel said Sunday it would release 104 Palestinians imprisoned before the 1993 Oslo accords -- some of whom are said to have been involved in attacks on Israelis.

Psaki said the US welcomed the vote by the Israeli cabinet to agree to the prisoner release as a "positive step forward."

Erakat also welcomed the Israeli move.

"We consider this an important step and hope to be able to seize the opportunity provided by the American administration's efforts," he told AFP.

But Israeli media on Monday lashed out at the decision. "The murderers will go free," thundered the front-page headline in the top-selling daily Yediot Aharonot.

Israeli President Shimon Peres, on a visit to Latvia, also hailed the resumption of peace talks.

"We want to establish a two-state solution of a Palestinian state beside the state of Israel, living in peace and friendship and bringing an end to all conflict, which is so necessary today for all the people in the Middle East," he said.