By Mark Heinrich

VIENNA, April 16 (Reuters) - Israeli-Palestinian peace talks launched under U.S. auspices are paralysed because there is no "wise mediator" to press Israel to stop expanding settlements on occupied land, the Arab League chief said on Wednesday.

"The question is how we can rescue the Annapolis process. The reality is that there are no concrete results toward a Palestinian state promised by the end of 2008, and no serious work in this direction," Amr Moussa told a news conference.

Speaking during a visit to Vienna for talks with Austrian leaders and the head of the U.N. nuclear watchdog, Moussa also signalled disapproval over U.S.-led efforts to isolate Iran with sanctions over its disputed nuclear activity.

"(For the Arab League) Iran is our neighbour, not an enemy, and differences with it can be settled by dialogue," he said, reflecting Arab concern not to see the standoff with Iran degenerate into military conflict inflaming the Middle East.

Negotiations on issues at the heart of the six-decade-old Israeli-Palestinian conflict have shown little outward sign of progress since they were revived at a U.S.-hosted conference in Annapolis, Maryland, in November.

Talks have been hobbled by differences over continued building of Jewish settlements on West Bank territory which Palestinians seek for the major portion of a future state, and by violence in the Gaza Strip.

Both sides committed to a U.S. goal of a deal on Palestinian statehood before U.S. President George W. Bush leaves office in January.

"Israeli steps have paralysed the Annapolis process, they paralyse any kind of peace process," said Moussa, secretary general of the 22-nation Arab League.

"There is apparently no wise mediator that can apply pressure on one side to suspend its settlement policy," he said.

"An atmosphere of desperation prevails," Moussa added, referring to settlements increasingly hemming in Palestinian towns in the West Bank and hundreds of Israeli army checkpoints, "and desperation cannot lead to peace."

Palestinians and their Arab allies have long complained of a lack of credible pressure from the United States, Israel's main ally, on the Jewish state to curb settlement-building, saying this is stripping them of territory needed for a viable state.

In 2005, Israel forced all 8,500 Jewish settlers to evacuate Gaza, but close to half a million live on West Bank land seized by Israel in 1967, including Arab East Jerusalem.

Palestinians say Israel's hesitation in freezing settlements shows bad faith and makes a mockery of any negotiation.

Israeli governments have argued at times they lack the power to prevent settlers from building and accuse Palestinian leaders of not honouring their pledges on halting attacks by militants.

World powers view the settlements as illegal under international law, including the Geneva Conventions. (Editing by Mary Gabriel)