The pounding chatter of jackhammers echoes over a wind-swept West Bank hilltop as workers lay bricks at a new apartment building rising in this sprawling Jewish settlement.

The Israeli government says it's ready to make a deal that would give Palestinians their own state. But realities on the ground — outlined in a report Wednesday showing vigorous Israeli construction in the West Bank — hold important implications for the latest U.S. peace push.

Israel insists on retaining some settlements to keep a foothold around Jerusalem and create a broader cushion at its narrow Tel Aviv-area waist.

Palestinians want a viable state, and the settlements — along with Israeli roads and a separation barrier jutting into the West Bank — threaten to fragment the territory and cut off east Jerusalem, where they want to establish their capital.

It has been a bitter issue for years, and finding a solution will tax efforts to work out a final peace accord.

"Everything that Israel is doing on the ground is, of course, an obstacle to what we are trying to achieve," said Rafiq Husseini, a top aide to Palestinian President Mahmoud Abbas. Nonetheless, he said, the Palestinians want to negotiate "until the last minute."

Israel continues to expand many of the 122 settlements in the West Bank, where 267,500 Israelis lived as of last month, according to government statistics.

Peace Now, an Israeli settlement-watchdog group, issued a report Wednesday saying building is going on in 88 of the settlements, though most of the work is in the areas Israel hopes to retain in a peace deal.

The Palestinians said Monday that they received assurances from Washington that Israel would meet its short-term obligations under the "road map," a U.S.-backed peace plan being revived in hopes of boosting confidence between the two sides ahead of a peace conference later this month.

The plan's initial stage called for Israel to freeze West Bank settlement construction and dismantle dozens of settlement outposts scattered across the territory. But the road map foundered after its introduction four years ago, with each side accusing the other of not meeting obligations.

Yet the violent takeover of the Gaza Strip last June by the Islamic militants of the Hamas movement has paradoxically led to renewed peacemaking between Israel's government and the more moderate Palestinian leadership now in charge of the West Bank.

Israel and Abbas' administration hope the U.S.-sponsored peace conference will launch full-fledged peace negotiations that will tackle all the key issues at the heart of their 60-year-old conflict, including the status of Jewish settlements.

The settlements are a key issue for the Palestinians, who want their future state to include all of the West Bank, which Israel captured in the 1967 Mideast war.

"Since the very beginning of the peace process, the Palestinians warned that the peace process and settlement process are incompatible and cannot move together, and one of them will kill the other," said Ghassan Khatib, a former Palestinian Cabinet minister.

Israeli Prime Minister Ehud Olmert said this week that Israel is willing to meet its road map obligations. He also urged the Palestinians to fulfill their commitment under the plan to crack down on militant groups that stage attacks on Israelis.

Israeli officials have spoken about a large-scale pullout from the West Bank, not unlike the Israeli withdrawal from the Gaza Strip two years ago.

But Israelis are firm on keeping large settlement blocs, mostly around Jerusalem. These account for about 8 percent of West Bank land, and Palestinians are demanding a state equal in size to the entire West Bank and Gaza Strip.

One way out of the predicament might be a land swap. Under such a plan, most Israeli settlers would stay where they are while unused land within Israel proper would be transferred to the new Palestinian state.

Abbas has voiced support for such a swap, though he has made clear he wants to be compensated with an equal amount of Israeli territory.

For Abbas to win Palestinian support for a peace deal, a land trade must be "based on a one-to-one ratio," said Khalil Shkaki, a prominent Palestinian pollster.

Bulldozers churned up earth and trucks tipped out stones on a recent afternoon at Betar Illit, a settlement of ultra-Orthodox Jews outside Jerusalem that has burgeoned into a community of about 30,000 people.

Signs there and in other nearby settlements openly advertise new housing that sells for a fraction of the price a similar home would command in Jerusalem.

Despite the road map's explicit ban on construction, Israel argues it should be permitted to keep building within existing settlements to accommodate "natural growth."

According to government figures, 2,169 apartments were completed in West Bank settlements last year. Peace Now said about 3,500 more homes are going up today.

Although building isn't proceeding at the furious pace of the 1980s and early 1990s, the settler population has more than doubled since Israel and the Palestinians signed their first peace deal in September 1993. Demand is fueled by large, low-income ultra-Orthodox families — motivated both by ideological connection to the biblical land of Israel and affordable housing.

Settlers aren't satisfied with the pace of expansion.

"If the government would allow us to build according to market demand, there would be a tremendous building spurt in Judea and Samaria," settler leader Shaul Goldstein said, using the biblical name for the West Bank.