* Netanyahu cites differences among friends

* Obama to address pro-Israel lobby on Sunday

WASHINGTON - Israeli Prime Minister Benjamin Netanyahu denied, before a speech on Sunday by President Barack Obama to a pro-Israel group, they were locked in crisis after their public dispute on Middle East peace.

"The reports of a disagreement have been blown way out of proportion," Netanyahu was quoted as saying on Saturday by a spokesman.

At the White House on Friday, Netanyahu bluntly rejected Obama's vision for the boundaries of a Palestinian state in the occupied West Bank and Gaza Strip, in what appeared to be the opening of a deep divide between Israel and the United States.

In a sharp rebuke to Israel's closest ally, Netanyahu told Obama his endorsement in an address on Thursday of the Palestinian demand to go back to Israel's 1967 frontiers -- meaning big land concessions -- would leave Israel indefensible.

Netanyahu's latest comments did not contain any change to that position.

But as Obama prepared to address the annual assembly in Washington of the pro-Israel lobby organization AIPAC, where he could face a cool reception from some delegates, Netanyahu appeared to be trying to calm any anger toward the president.

"It's true we have some differences of opinion, but these are among friends," the spokesman quoted him as saying.

Netanyahu believed that Obama had "shown his commitment to Israel's security, both in word and in deed," the spokesman added. "And we are working with the administration to achieve common goals."

The spokesman did not define those shared goals, but Israeli officials have cited Obama's opposition to a Palestinian bid to win UN recognition of a state in the September in the absence of peace talks, and to Iran's nuclear program.

NETANYAHU SPEECHES

Netanyahu addresses AIPAC on Monday and a joint meeting of Congress on Tuesday, with political commentators speculating as to whether he would use those platforms to attack Obama's peace outline or try to ease their strained relations.

Obama, in his speech on Thursday, laid down his clearest markers yet on the compromises he believes Israel and the Palestinians must make to resolve a conflict that has long been seen as source of Middle East tension.

But he did not present a formal US peace plan or any timetable for a deal he had once promised to clinch by September.

Pushing Netanyahu risks alienating the Jewish state's base of support among the U.S. public and in Congress as Obama seeks re-election in 2012.

Talks brokered by Washington at Obama's initiative collapsed last year when Netanyahu refused to extend a moratorium on settlement building in the West Bank.

In Thursday's speech, Obama said: "We believe the borders of Israel and Palestine should be based on the 1967 lines with mutually agreed swaps" of land.

Netanyahu, himself, appeared to hint, in a speech to Israel's parliament on Monday, at a territorial trade, saying that his government would retain "settlement blocs" in any future peace deal.

The remarks were widely interpreted as indicating he would be prepared to abandon smaller, isolated settlements, and they drew fire from right-wing politicians and settler leaders.