But peace prospects were again thrown into doubt when Israel´s Interior Ministry announced the building plans for Ramat Shlomo, a religious Jewish district that falls within the expanded Israeli municipal boundaries east of Jerusalem.

Palestinians want a state in the West Bank and Gaza, which Israel took along with East Jerusalem in a 1967 war. Their vision of a capital in East Jerusalem clashes with Israel´s claim, unrecognised abroad, on all the city as its own capital.

Israel´s plan to expand the Ultra Orthodox Jewish neighborhood of Ramat Shlomo neighborhood previously stirred Palestinians´ anger in 2008, when the Israeli government said it planned to build 1,300 new homes in the area.

The Obama administration welcomed Netanyahu´s institution in November of a partial 10-month building settlement freeze. But Washington has voiced misgivings about continued Israeli building in East Jerusalem, where the moratorium does not apply.

In private meetings with U.S. officials, Israel has objected to dealing with core issues such as borders and the future of Jerusalem in the indirect talks, a key Palestinian demand.

Israel has suggested the talks be held in Jerusalem and the West Bank city of Ramallah rather than in a venue like Washington.