Israel's plan to build 565 new homes in Jewish enclaves on the West Bank (search) drew criticism and an implicit threat Friday from the Bush administration.

Settlement activity is unhelpful to peacemaking with the Palestinians (search), and the construction will be taken into account as the Bush administration reviews its promises of loan guarantees to Israel, the State Department spokesman Richard Boucher said.

Secretary of State Colin Powell (search) also criticized Israel on the Jewish state's announced intention to construct a security fence extending into Palestinian terrority.

In an interview with The Washington Post, Powell said Israel's proposal to leave large gaps in the fence would not satisfy U.S. concerns. He said U.S. officials were having "intense discussions" on their response. The interview was being published in Saturday editions of the Post.

The new homes would be built deep inside the West Bank, which the Palestinians, with support from President Bush, intend to take over for a state. The U.S. view is the more territory Israelis live in, the harder it will be to unscramble the area and establish lasting borders.

Even so, the Bush administration continued to give highest priority Friday to the formation of a Palestinian government with the resources to "carry out action" against terrorists.

While public U.S. criticism of Israel was relatively mild, the State Department's frustration with the stalled peace effort was apparent.

New housing construction "is unhelpful in terms of the process of movement on peace as well as the achievement of the president's vision of two states living side by side," Boucher said.

Besides, he said, "It puts people in areas that need to be negotiated."

The threat of punishment involves a review of how much to reduce in $9 billion in loan guarantees that the Bush administration promised Israel to help offset its weak economy.

Under law, the guarantees, which help Israel obtain favorable commercial rates, can be reduced dollar-for-dollar by what Israel spends on expanding settlements.

Incoming Palestinian Prime Minister Ahmed Qureia has accused Israel of trying to circumvent peace talks by seizing land the Palestinians want for a state.

The West Bank was held by Jordan after World War II until Israel defeated Arab armies in 1967 and took over the territory. Most residents are Palestinian Arabs.