Israel's Housing Ministry has backed away from a preliminary proposal to build homes on occupied land near Jerusalem that had been criticised by Palestinian and Israeli officials.

"The construction is no longer being discussed," a ministry official said.

The issue of Israeli settlement building in the Jerusalem area has clouded renewed peace talks between Israel and the Palestinians launched at a U.S.-sponsored conference last month.

Disputes over settlements and Jerusalem are central to the negotiations President George W. Bush hopes can be concluded before he steps down in January 2009.

The ministry said on Wednesday it had been discussing the possibility of building homes near what Israel refers to as Atarot and the Palestinians call Qalandia in the occupied West Bank.

Israel annexed Arab East Jerusalem after the 1967 Middle East war in a move that has not won international recognition. It regards all of Jerusalem as its capital.

The Palestinians want East Jerusalem to be the capital of the state they hope to create in the West Bank and Gaza Strip.

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