Secretary of State Condoleezza Rice criticized Israeli settlement activity in exceptionally harsh language on Sunday, saying new construction projects on disputed land has a "negative effect" on Mideast peace talks.

Rice made the comments during her latest attempt to prod Israelis and Palestinians toward a final peace deal by the end of the year, a goal she said is ambitious but still within reach.

After a meeting with Palestinian President Mahmoud Abbas, Rice said the U.S. remains committed to the target date. But she said Israeli plans to build thousands of homes in the West Bank and east Jerusalem raises questions about Israel's motives and harms the atmosphere of good faith for talks.

Last week, Israel said it would build 1,300 new apartments in east Jerusalem.

"It's important to have an atmosphere of trust and confidence," Rice said. "Unfortunately, I do believe, and the United States believes, that the actions and the announcements that are taking place are indeed having a negative effect on the atmosphere for negotiations."

Rice stressed that the United States won't regard any settlements Israel build as permanent.

"We should be in a position of encouraging confidence, not undermining it. No party should be taking steps at this point that could prejudice the outcome of the negotiation," Rice said.

The U.S. diplomat said she had made her point to each of several senior Israeli officials she saw Sunday, and she said she would do the same later at a dinner with Prime Minister Ehud Olmert. The Israeli leader's office declined to comment.

Speaking to U.S. reporters in Jerusalem later in the day, Rice said she had seen no change in Israel's position on settlement activity.

On another issue of friction between the United States and its closest Mideast ally, Rice said she sees no reason that Israel has not yet approved travel papers for Palestinian students from the Gaza Strip who won prestigious Fulbright scholarships for study in the U.S.

Three of the seven scholarship winners have been held up because of unspecified security concerns. The students had been told by U.S. diplomats that they could not use their fellowships this year because Israel did not approve travel papers, but Rice intervened.

"I consider it extremely important for these young people to be able to take up their fellowships," Rice said.

Rice's agenda also includes a three-way meeting with the chief Israeli and Palestinian negotiators, and another joint meeting with Israel's defense minister and the Palestinian prime minister set for Monday. She cautioned that she did not expect any "blinding breakthroughs."

Palestinian leaders repeatedly have said Israeli settlement construction was undermining public support for peace talks. "We consider the settlements as the biggest obstacle to the political process," Abbas told Sunday's news conference.

The Palestinians claim all of the West Bank as part of a future independent state, with east Jerusalem as its capital. Israel captured both areas in the 1967 Mideast War. Today, some 250,000 Israelis live in West Bank settlements, along with 180,000 Israelis in east Jerusalem.

Under the U.S.-backed "road map" peace plan, Israel has pledged to halt all settlement activity. But Olmert has said he would continue building in West Bank settlements that Israel expects to retain under a final peace agreement.

He also says the freeze does not apply to east Jerusalem, which Israel annexed after the 1967 war. The annexation has not been internationally recognized.

Rice, however, said the status of all disputed land must be resolved through negotiations, and existing Israel settlements would not prejudice those talks. She said European leaders with whom she had just met similarly thought that settlement construction had hurt negotiations.

Israel and the Palestinians resumed peace talks last November at a summit in Annapolis, Md. At the time, they pledged to try to reach a peace deal by the end of 2008, just before President Bush leaves office.