Palestinians told U.S. Vice President Joe Biden on Wednesday that Israel's new plan to build 1,600 homes for Jewish settlers challenged Washington's efforts to get indirect peace talks underway.

In Jerusalem, an Israeli cabinet minister apologized for what he termed real embarrassment caused to Biden by the news on Tuesday that Israel would erect the housing units in an area of the West Bank it annexed to the holy city.

Biden condemned the project, whose announcement clouded a mission to Israel that had been focused on reassuring Israelis that President Barack Obama was committed to their security in the face of a possible Iranian nuclear threat.

This is a moment of great challenge to the effort by the United States to get the political process going again, Palestinian Prime Minister Salam Fayyad said at a meeting with Biden.

Fayyad said Israel's action was damaging for sure and definitely undermines confidence in the prospects for peace.

Aides to Israeli Prime Minister Benjamin Netanyahu said he had been blindsided by the project's announcement by the Interior Ministry, run by Shas, an ultraorthodox, nationalist party that is a key member of his governing coalition.

The Palestinians, who had called for a settlement freeze as a condition for resuming talks suspended since December 2008, agreed this week to indirect negotiations with Israel under U.S. mediation, but no date, venue or agenda has been set.

Chief Palestinian negotiator Saeb Erekat said President Mahmoud Abbas would ask Biden in a meeting later in the day to press Israel to revoke the settlement decision.

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Netanyahu ordered in November a 10-month halt to new housing starts in West Bank settlements but exempted those Israel considers part of Jerusalem and projects for Jewish homes in the eastern sector of the city captured in 1967.

Messages have been sent to Biden and the Americans that there was no intention to undermine him, a senior Israeli official said. We were genuinely surprised, just as surprised as the Americans.

Netanyahu took no steps to reverse the decision. Israel considers all of Jerusalem its indivisible and eternal capital. Palestinians want East Jerusalem as the capital of a state they hope to establish in the West Bank and Gaza Strip.

Shas's promotion of the plan was an indication to the Obama administration of the problems Netanyahu would face within his government should he make bold moves, as Washington has demanded, toward a land-for-peace deal with Palestinians.

Biden kept Netanyahu and wife Sara waiting for 90 minutes at a dinner they were hosting for him and his spouse Jill on Tuesday, after the project was made public.

I condemn the decision by the government of Israel to advance planning for new housing units, Biden said in a statement issued after he finally arrived for the meal.

He said the blueprint for Ramat Shlomo, a religious Jewish settlement, undermines the trust we need right now and runs counter to the constructive discussions that I've had here in Israel.

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