Condoleezza Rice criticized Israel on Friday for planning to build new homes on occupied land in the Jerusalem area -- a move Palestinians say could wreck a peace process Rice helped launch last week in Washington.

"We are in a time when the goal is to build maximum confidence with the parties and this doesn't help to build confidence," the U.S. Secretary of State said in rare public censure of Washington's closest ally in the Middle East.

At a news conference at NATO in Brussels after she had met Israeli foreign minister Tzipi Livni, Rice added: "There should not be anything which might prejudge final-status negotiations.

"It's even more important now that we are on the eve of the beginning of the negotiations. I made that position clear."

Rice has to a degree staked her claim to a foreign policy legacy going into the final year of the Bush administration on seeking a settlement of the 60-year-old Palestinian-Israeli conflict. Last week's accord at Annapolis, Maryland, to resume negotiations after a violent, 7-year hiatus came after nearly a year of Middle East shuttle diplomacy by the secretary of state.

Negotiators from both sides are due to meet in Jerusalem on Wednesday for a first round of talks since U.S. President George W. Bush oversaw handshakes on the deal between Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas.

Bush, whose presidency has been marked by the war in Iraq, has been criticized by some for previously neglecting the issue.

Disputes over settlements and Jerusalem, which Israel wants as its undivided capital and where Abbas wants East Jerusalem as capital of a Palestinian state, are central to negotiations Bush now hopes can conclude before he steps down in just 13 months.

NEW HOMES

Earlier, Olmert's spokesman confirmed Washington had asked for an explanation of the announcement by Israel this week that it was seeking bids from construction firms to build over 300 new homes and other units at a site south of East Jerusalem.

U.N. Secretary General Ban Ki-moon called it "not helpful."

Palestinians say new building at the site, known as Har Homa by Israel and Abu Ghneim by Arabs, breaches the undertaking Olmert renewed last week to halt settlement activity in the West Bank -- part of a pledge made under the 'road map' plan of 2003.

Olmert's spokesman said the tender was part of a 7-year-old plan and repeated the Israeli position that the site falls outside the road map deal because Israel annexed the land, occupied with the rest of the Palestinian territories in 1967.

The annexation of East Jerusalem and incorporation of surrounding West Bank areas within much expanded Jerusalem city limits is not recognized internationally. Israel has settled Jews on much of that land, effectively isolating East Jerusalem.

The United States agreed at Annapolis to adjudicate on how far each side was meeting commitments. Israel's main demand from the Palestinians is that Abbas curb militant attacks on it.

Abbas aide Nabil Abu Rdainah said Washington must act now: "Asking them to explain is not enough. The Americans must pressure the Israeli government to stop settlement activities.

"They weaken trust between Israelis and Palestinians."

Bush's one-year deadline for a deal to end the conflict was greeted with skepticism by many on both sides. The depth of feeling over settlement in the West Bank, where some 250,000 Jews live among 2.5 million Palestinians, is just one obstacle.

Israel wants to draw a fortified border through the West Bank that would place major settlements inside a newly defined Israel and says it could remove outlying communities.

A poll published in Israel's Maariv newspaper found only 17 percent of settlers living beyond the barrier Israel is building would leave even if offered double the value of their property.

(Additional reporting by Ali Sawafta in Ramallah, Haitham Tamimi in Hebron and Arshad Mohammed in Washington, writing by Alastair Macdonald; Editing by Giles Elgood)