"Israel has done a few things in that regard, but they need to do much more," Clinton said in Marrakesh where she was due to meet the Arab ministers to talk on the peace process.
"[Palestinian President Mahmoud] Abbas has shown leadership and determination on this issue and Israel should reciprocate."
The state department announced that Clinton would fly to Egypt on Wednesday to meet President Hosni Mubarak as part of a regional tour.
'Short of preferences'
On Sunday, the Palestinians criticised Washington for jeopardising the peace process after Clinton called for the resumption of talks without preconditions as soon as possible, dropping their former demand for Israel to end settlement building.
The Palestinians say that a viable state for their people will not be possible with more settlements.
After talks with Taieb Fassi Fihri, Morocco's foreign minister, on Monday, Clinton added that the Israelis had expressed "a willingness to restrain settlement activity".
"This offer falls far short of what our preference would be, but if it is acted upon, it will be an unprecedented restriction on settlements and would have a significant and meaningful effect on restraining their growth."
Amr Moussa, the Arab League secretary-general who was also in Marrakesh, said that he feared the attempts made by Barack Obama, the US president, to push forward the peace process will come to nothing due to the settlement issue.
"I am telling you that all of us, including Saudi Arabia, including Egypt, are deeply disappointed ... with the fact that Israel can get away with anything without any firm stand that this cannot be done.
"I still wait until we have our meetings and decide what we are going to do. But failure is in the atmosphere all over."
After meeting Netanyahu in Jerusalem last week, Clinton is to hold a bilateral meeting with Prince Saud al-Faisal, the Saudi foreign minister, and group talks with Gulf Arab ministers and Egyptian, Jordanese and Iraqi officials on the sidelines of the conference in Morocco.
Netanyahu has proposed the building of 3,000 settler homes already planned in the occupied West Bank as the only construction for now. Yet, he has not said that settlement building in East Jerusalem - ruled as occupied under international law - should be stopped.
About 500,000 Israeli settlers and 2.8m Palestinians live in the occupied West Bank and East Jerusalem, territories captured by Israel in a war in 1967.