The decision to build at Tel Rumeida, a small Jewish enclave in the Palestinian city of Hebron, underlines the confidence of Benjamin Netanyahu, the Israeli Prime Minister, that President Bill Clinton is in no position to put pressure on him to carry out the next phase of Israeli withdrawals under the terms of the Oslo accords.
"Such decisions will kill the peace process," said Saeb Erekat, the chief Palestinian negotiator. "This is very, very dangerous and we urge Mr Netanyahu to revoke this decision for the sake of the peace process."
Israel said the decision to build at Tel Rumeida was taken after a settler rabbi was stabbed to death in August, but the timing of the move shows how far Israel and the Palestinians are from permanent peace.
Hours after the announcement James Rubin, the State Department spokesman, said he had asked for details of the Israeli move. Mrs Albright had called for a "time-out" on settlement activity.
US officials were last night seeking to arrange a three-way meeting today between Mrs Albright, Mr Netanyahu and Yasser Arafat, the Palestinian leader, at the Erez checkpoint into Gaza, home to one million Palestinians.
This would try to lay the groundwork for a summit in mid-October in Washington between Mr Clinton and the Israeli and Palestinian leaders.
Israel and the Palestinians have agreed on a 13 per cent Israeli withdrawal from the West Bank but Israel is demanding stringent security measures.
The Palestinians insist that these should be reciprocal and also believe that Mr Netanyahu uses security as an excuse not to carry out the Oslo accords of 1993 and the interim agreement of 1995.
Mrs Albright was careful to lower expectations yesterday, saying: "We recognise that there are tough choices to be made by each side, especially as we approach the Washington summit."
The US administration is eager to arrange a meeting which would allow Mr Clinton to present himself as an international statesman at a time when his impeachment is being considered.
Mr Rubin said that the present US visit to Israel did not expect to resolve all issues, but to make a final agreement in Washington.
Israel recognises that Mr Clinton is in a weak position and that he is hungry for diplomatic success. Nahum Barnea, an Israeli columnist, said: "Clinton needs the [signing] ceremony like oxygen." Mr Netanyahu may also be under some covert pressure from the Republican party, where he has many friends, not to hand Mr Clinton a diplomatic triumph shortly before the mid-term congressional elections.Reuse content