The first formal Israeli Palestinian negotiating process for seven years made an acrimonious start yesterday in the shadow of plans for new Jewish housing in Arab East Jerusalem and the threat of military escalation in Gaza.

Palestinian negotiators used the first session since the international Middle East conference in Annapolis to express their outrage over plans for an expansion of the settlement of Har Homa - already criticised by the US, EU and UK government.

And as Gabi Ashkenazy, the Israeli military's Chief of Staff warned of the growing prospect of a "big operation" in Gaza to counter Qassam rocket fire, Eli Moyal, mayor of Sderot,the Israeli town closest to the Gaza border, resigned, saying he hoped the move would spur tougher measures against Hamas.

Mr Moyal, whose town has borne the main impact of the Qassams, announced his resignation after an estimated 20 rockets hit Sderot and the surrounding area yesterday, causing minor damage and lightly wounding one woman. Islamic Jihad said it had fired 11 of the rockets in retaliation for the Israeli incursion which killed at least six militants on Tuesday.

General Ashkenazy told an Institute for National Security Studies conference in Tel Aviv that daily offensives like Tuesday's "broad operation" in Gaza helped to reduce but not halt the rocket fire. "We will come to the point where we will have to carry out the big operation" he added.

Meanwhile Palestinian Liberation Organisation negotiator Saeb Erekat said that his side had raised the plans to build 300 new homes in Har Homa and "expressed our outrage." He added: "We are coming to negotiate over Jerusalem and borders, and the dictation and facts on the ground continue. If you want to restore the credibility of the peace process, the Israeli government must revoke this order."

Israel regards itself as having annexed East Jerusalem after the Six Day War. But this is rejected by the international community—as well as the Palestinians - who regard the post-1967 Jewish communities in East Jerusalem as settlements in occupied territory.

The two sides are expected to meet again at next week's donors' conference in Paris, to be co-chaired by the Middle East envoy Tony Blair. Yasser Abed Rabbo, another Palestinian negotiator, declared: "We demanded a complete halt to the settlement building... We have agreed to meet again, nothing else."

Mark Regev, spokesman for Israeli Prime minister Ehud Olmert, said yesterday's had been the first of many meetings. He added: "I can assure you that Israel is ready to move forward with the Palestinians for a historic compromise."

"We are operating in Gaza on a daily basis. [On Tuesday] we returned from a broad operation - this brings a reduction in the ground threat and the firing of rockets but does not stop it," Ashkenazi said.

The highly anticipated renewal of peace talks between Israelis and Palestinians got off to a rocky start Wednesday, with the Palestinians lambasting Israel for a new construction project planned in disputed east Jerusalem and Israel complaining about continued rocket fire from the Gaza Strip. The meeting had been meant to build on the momentum of last month's Mideast peace conference in Annapolis, Maryland. Instead, the 90-minute session ended in acrimony.

The Palestinians have said the planned construction in the Har Homa neighborhood, along with Israeli military activity in the Gaza Strip, have threatened to undermine the new peace talks. He said there were no immediate plans to meet again, though officials said they expected talks to resume in the next two weeks.

Israeli government spokesman Mark Regev said this was the first of many meetings Wednesday's meeting was the first formal negotiating session since Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas relaunched peace making in Annapolis, setting an ambitious target of December 2008 for concluding a peace agreement that would end six decades of conflict.

The last peace talks broke down in violence in January 2001.

The troubles at Wednesday's meeting, which lasted just 90 minutes at a Jerusalem hotel, showed just how far the sides have to go.

Initially scheduled to kick off with a ceremonial launch at the ornate King David hotel, the talks were held secretly at another hotel in the city. Negotiators sped away from the meeting without commenting to reporters who discovered the location of the talks after they had begun.

Conflicting claims to Jerusalem are just one of the thorny issues they will have to resolve in the coming year.

The Palestinians seek east Jerusalem, which Israel captured in the 1967 Mideast War, as the capital of a future independent state. Israel considers all of the city its capital, though Olmert has signaled he would be willing to relinquish outlying Arab neighborhoods.

Other core issues negotiators must tackle include the final borders of a Palestinian state, the future of Jewish settlements in the West Bank and the fate of millions of Palestinian refugees whose families lost properties during Israel's 1948 War of Independence.

The Hamas militant group's violent seizure of the Gaza Strip last June has further complicated matters. Abbas' lack of control over Gaza has raised questions about his ability to carry out any future peace deal.

An Israeli official described Wednesday's talks as tense, confirming the Palestinians complained about Har Homa, Jewish settlement construction in the West Bank and Israeli military activity in Gaza.

The official, speaking on condition of anonymity because he was not authorized to speak to the media, said Israel complained about ongoing Palestinian rocket fire from the Hamas-controlled Gaza Strip.

Early Wednesday, Palestinian militants fired 20 homemade rockets toward Israel, causing minor damage and lightly wounding one woman, Israeli officials said.

The barrage came hours after Israeli forces ended a broad incursion into the coastal strip that killed six militants and left a wide swath of damage in its wake.

Israel is pursuing peace with Abbas' moderate government in the West Bank. At the same time, it continues to battle the Hamas militant group, which has ruled Gaza since defeating Abbas' forces last June.

Israel regularly carries out brief ground incursions and airstrikes in Gaza in a bid to stop Palestinian rocket and mortar attacks on southern Israeli towns. Repeated military action, however, has failed to prevent militants from launching the primitive rockets.

In southern Israel, the mayor of the small town that has borne the brunt of the rocket attacks announced his resignation, saying the situation is "impossible." Eli Moyal said he hoped his resignation will spur authorities into action against Hamas.

The Islamic Jihad militant group said it fired nine of the rockets to avenge Israel's incursion. "The resistance is going to escalate the operations targeting the Zionist colonies in the coming hours," said Abu Ahmad, a spokesman for the group.

Later Wednesday, an Islamic Jihad militant was killed while firing a mortar in central Gaza. The group said the man was killed by Israeli fire, but the Israeli army said it was not in the vicinity.

Tuesday's operation, in which tanks and bulldozers pushed 1.5 km (2.5 miles) into southern Gaza, was the broadest push since the Hamas takeover. Early Wednesday, the troops had withdrawn to a buffer zone along the Israeli border.

The Israeli forces left behind heavy damage to al-Fukhari, a farming community near the southern town of Khan Younis.

About 75 acres of olive trees and orange groves were uprooted, greenhouses and the outer walls of homes were damaged, and homes were left without power, said Ouda Alomar, mayor of the community. Repair crews were trying to restore electricity and reopen roads that were closed with dirt mounds put up by the troops, he said.

Olmert convened his security Cabinet, a group of top political and defense officials, to discuss the Gaza situation. Officials decided to continue the police of brief incursions into Gaza, but decided against launching a broad invasion of the area.

One Cabinet member,speaking on condition of anonymity because he was not authorized to talk to the media, said officials are concerned that a broad invasion would cause heavy casualties to Israeli troops and damage the prospects for peace talks.