Israel announced plans Tuesday to build more than 1,000 new homes in disputed east Jerusalem, infuriating the Palestinians and triggering a new crisis in already troubled peace talks.

The Palestinians accused Israel of undermining efforts to reach a peace agreement by the end of the year and urged Israel to halt the project.

The fate of east Jerusalem is the thorniest issue in peace talks. Israel captured the area in the 1967 Middle East war, annexed it and has built a string of neighborhoods that are now home to 180,000 Israelis.

The Palestinians claim east Jerusalem as the capital of a future independent state and have been urging Israeli Prime Minister Ehud Olmert to halt all construction in the area.

Olmert's housing minister, Zeev Boim, announced the latest construction plans in response to assertions from Jerusalem's city manager that Olmert is holding up work in east Jerusalem.

Boim said a partial building freeze ordered by Olmert recently applies only to settlements in the West Bank and does not include Jerusalem. "We are building all over Jerusalem within its municipal borders. What people call delays are in fact final stages of coordination with City Hall," Boim told Israel Radio.

He said plans were underway to build 370 homes in Har Homa and an additional 750 apartments in Pisgat Zeev, two Jewish neighborhoods in east Jerusalem.

Israel disclosed a similar plan in December to build some 300 homes in Har Homa, just days after resuming peace talks with Palestinian President Mahmoud Abbas at a U.S.-hosted summit in Annapolis, Maryland.

That plan drew U.S. criticism and stalled the talks for weeks.

At the Annapolis summit, Olmert and Abbas set a December 2008 target for reaching a final peace accord. On Tuesday, Palestinian negotiator Saeb Erekat said the latest construction threatens chances of meeting that goal.

"We condemn these Israeli declarations, and once again we ask the Israeli government to give peace a chance by stopping all settlement activity," he said.

In Washington, White House press secretary Dana Perino said she had not seen the report. "But, obviously, there's no doubt that an announcement of that sort would make the Palestinians concerned," she said.

She said such disagreements were expected. "What we're seeing now ... is what we forecast would happen, which is there are going to be difficult issues that they have to resolve and there was going to be halting progress," she said.

During a visit to Germany, Olmert did not comment directly on the uproar, but said talks on Jerusalem would be put off to the end of the negotiating process.

"We try to move on forward through those issues which can be resolved, perhaps, faster than the others," he said. "Some other issues are on the agenda, but they will be discussed later, including the issue of Jerusalem."

Israel expects to retain Jewish east Jerusalem neighborhoods under a final peace deal, but the Palestinians still see construction there as compromising a final agreement.

East Jerusalem is home to 208,000 Palestinians, according to a recent Palestinian census. The Palestinians hope to establish an independent state that includes the West Bank and Gaza Strip, with east Jerusalem as their capital. Israel captured the areas in the 1967 war, though it withdrew from Gaza in 2005.

Olmert has signaled a readiness to relinquish most of the West Bank and some Arab neighborhoods of Jerusalem as part of a final peace deal.

His flexibility on Jerusalem has prompted criticism from hard-line political opponents, as well as even members of his fragile coalition government. Shas, an ultra-Orthodox Jewish party, has threatened to pull out of the government if Olmert begins talks on Jerusalem. Such a move would rob Olmert of his parliamentary majority, possibly toppling the government and forcing elections.

As a result, the Israeli leader has been maintaining a balancing act — trying to avoid provocative moves that anger the Palestinians while keeping his coalition intact. Further complicating the situation, opinion polls show most Israelis opposed to a compromise in Jerusalem.

More than two months after renewing peace talks, negotiations appear to have made little progress and have been marred by militants firing rocket barrages at Israeli towns from the Gaza Strip and Israeli reprisals aimed at halting the fire.

Israel has warned that it will not carry out any peace agreement until Abbas regains control of Gaza, which was overrun by the violent Islamic Hamas last June.

Earlier this week, Israel's defense minister threatened to topple Gaza's Hamas government if rocket fire continues. Fearing assassination, top Hamas leaders have gone into hiding.

One of those leaders, Hamas Prime Minister Ismail Haniyeh, issued a statement Tuesday saying "these threats are not going to scare us or terrify our people."

Also Tuesday, Israel said it broke up a militant funding ring in the West Bank. Israeli troops raided 14 money-changing offices, confiscating nearly $850,000 (euro585,000) and arresting five Palestinians on suspicion funds were transferred from abroad for militant groups, the army said.