US secretary of state Hillary Clinton has said Israel's plan to proceed with more settlement building in the West Bank as "counterproductive" to peace negotiations.
She announced the United States will give an additional $150 million to the Palestinian Authority as Washington seeks to boost the fledgling government amid an impasse in the peace talks with Israel.
The funding was announced one day before she was to meet with Israeli prime minister Benjamin Netanyahu, who is on a five-day visit to the United States.
Ms Clinton faces the difficult prospect of reviving Middle East peace talks that began in Washington in September but were suspended three weeks later when Mr Netanyahu refused to extend a 10-month limited building freeze in West Bank settlements.
Israel announced on Monday it was moving ahead with a housing project in a part of the occupied West Bank that Israel annexed to Jerusalem 43 years ago.
"This announcement was counterproductive to our efforts to resume negotiations between the parties," Ms Clinton told reporters. "We still believe that a positive outcome is both possible and necessary."
In New York, Mr Netanyahu's spokesmen voiced confidence that friction with the United States over the settlement expansion would be smoothed over.
"There are disagreements sometimes between friends and we know how to work through such disagreements and move on," Israeli Cabinet Secretary Tzvi Hauser told Israel Radio in an interview from New York.
Nir Hefez, Mr Netanyahu's chief spokesman, said in a separate interview with Israeli Army Radio: "The colourful descriptions of a head-on collision, of provocation, are far from the reality."
Ms Clinton announced the funding for the Palestinian Authority in a joint video conference with Palestinian prime minister Salam Fayyad, who has been scrambling to fill a huge projected budget hole as his government expands services in expectation of full eventual statehood.
The slow arrival of funds, especially from Arab states, has forced Mr Fayyad to take austerity measures, and he said in September he needed about $500 million this year to fund everything from official salaries to infrastructure projects.
The US pledge comes as Washington pushes both the Palestinians and Israel to resume peace talks, which have fallen into limbo following Israel's decision not to extend a moratorium on new settlement construction on land the Palestinians say should be part of their new state.
US president Barack Obama said today that "enormous obstacles" remain in the Middle East peace process but that the United States would continue to work toward the goal of setting up an independent Palestinian state living side by side in peace with Israel.
Reuters