Israel seeking to formulate response to US on settlements

(JERUSALEM) - The Israeli cabinet was seeking Wednesday to formulate a response to US complaints over its settlement plans that heightened tension just as the US administration is promoting peace efforts.

Hawkish Prime Minister Benjamin Netanyahu's restricted security cabinet held a late night session to discuss its answer to the US administration's call for confidence-building steps ahead of proposed indirect peace talks.

There was concern that delaying the response would further exacerbate the rift between the two allies triggered by Israel's announcement last week of plans to build 1,600 new Jewish settler homes in annexed Arab east Jerusalem.

Washington was all the more incensed as the announcement was made while Vice President Joe Biden was in Israel to promote new, indirect peace talks with the Palestinians.

But President Barack Obama on Wednesday denied US-Israeli relations were in a crisis.

Asked in an interview with Fox News if there was a "crisis" Obama said: "No," adding: "We and the Israeli people have a special bond that's not going to go away.

"But friends are going to disagree sometimes... there is a disagreement in terms of how we can move this peace process forward."

He called on both Israelis and Palestinians to "take steps to make sure that we can rebuild trust."

But the prospects for a swift resumption of peace negotiations, halted when Israel launched its devastating Gaza offensive in December 2008, appeared dim.

On Wednesday, Israeli Foreign Minister Avigdor Lieberman sharply criticised international demands for a freeze of Jewish settlement construction in east Jerusalem, which Israel annexed in 1967 in a move never recognised by the international community.

"This demand to forbid Jews from building in east Jerusalem is totally unreasonable," Lieberman said at a joint news conference with visiting EU foreign policy chief Catherine Ashton.

Palestinians consider east Jerusalem an integral part of the occupied West Bank and claim it as the capital of their promised state.

Palestinian president Mahmud Abbas on Wednesday insisted Israel must abide by its "obligations" and "freeze settlement activity in all Palestinian territories, including Jerusalem."

The settlement issue is certain to figure prominently at Friday's meeting in Moscow of the Middle East diplomatic quartet, to be attended by Ashton, US Secretary of State Hillary Clinton, UN Secretary General Ban Ki-moon and Russian Foreign Minister Sergei Lavrov.

Ashton was due to travel to Moscow from the Middle East, where she met Netanyahu and Abbas and planned a brief visit to Gaza later on Thursday, a rarity for a senior Western official given the continued terror blacklisting of its Hamas rulers by both the EU and the United States.

Ban too was due to visit the region, including Gaza, after the Quartet meeting.

The diplomatic activity comes at a time of heightened religious and political tension that saw several days of clashes between Palestinians and police in east Jerusalem.

An already charged atmospshere intensified over the opening this week of a rebuilt 17th century synagogue in the Jewish quarter of the Old City, a few hundred metres (yards) from the Al Aqsa mosque compound.

Many Palestinians view Israeli projects near the mosque compound -- Islam's third holiest site -- as an assault on its tense status quo or a prelude to the building of a third Jewish temple there.

Jews call the compound the Temple Mount and consider it their holiest site because the second Temple stood there before the Romans destroyed it in 70 AD.