The Jerusalem neighborhood of Har Homa, with its white stone buildings and billboards hawking new real estate projects, now has managed to disrupt Israeli-Palestinian peace talks for the second time in a decade.

Israel's announcement this month that it plans to build 307 new homes in this east Jerusalem neighborhood, on land Palestinians want for the capital of their future state, drew international condemnation.

The plan was the first wrench thrown into peace negotiations relaunched last week after a violent seven-year hiatus.

For Har Homa residents like Eliran Nissim, the 30-year-old proprietor of a pizza parlor, nothing could be more natural than building more apartments for people like him.

"It's my country, it's the country of the Jews, and we will try to build in it 100 percent," said Nissim, who has decided to stay although he says he's come under fire twice from nearby Arab villages.

For Palestinians, the bulldozers and tractors that are hard at work expanding Har Homa are a show of bad faith.

Building new homes for Israelis in the neighborhood violates two of Israel's obligations: to negotiate the future of the city and not to expand settlements, said Palestinian negotiator Saeb Erekat.

"It is either settlements or peace," Erekat said. "Jerusalem is subject to negotiations. No one should try to pre-empt that."

Services and shops are still scarce in Har Homa, giving the neighborhood a somewhat desolate feel. On a recent afternoon, young mothers pushed strollers and city buses picked up commuters along streets still being paved.

A van decorated with colorful blinking lights blared music, celebrating the arrival of a new Torah scroll at a local synagogue, and residents gathered around it, clapping.

But Har Homa is a political statement as much as it is a residential neighborhood, and has been a lightning rod for controversy even before it was built.

A decade ago, Israel's announcement of the project set off Palestinian riots, was criticized by the international community and brought on a crisis in peace talks that already were faltering.

Construction began in earnest in 2000, the same year negotiations collapsed in violence. The first residents began moving in with little fanfare two years later.

Built on a hilltop known to Palestinians as Jebel Abu Ghneim, Har Homa is part of a network of Jewish neighborhoods in Jerusalem that ring Palestinian areas. Palestinians charge the Israeli goal is to cut Arab neighborhoods off from each other and stand physically in the way of making east Jerusalem the capital of a Palestinian state.

Israel annexed east Jerusalem shortly after its capture in the 1967 Mideast war, but the international community has never recognized the move.

Har Homa was built in order to close the empty area between south Jerusalem and the Palestinian town of Bethlehem, an attempt to disconnect Arab Jerusalem from its West Bank hinterland, said Israeli political scientist Menachem Klein of Bar Ilan University.

The neighborhood now has 2,100 homes and 8,500 residents, according to figures from the Jerusalem municipality. Most are Jewish families drawn less by ideology than by relatively low housing prices in an increasingly expensive city.

The new neighborhood, the network of roads around it and Israel's West Bank separation barrier that encloses it are causing hardship to Palestinians and undermining their hopes for a state, said Bethlehem governor Salah Tamari, who led protests against the project a decade ago.

"The area for Bethlehem ... has shrunk and we don't know how far they will go. If settlements continue at the same pace, there will be no more land for the Palestinians to build a state on," Tamari said.

The new announcement came at a sensitive time, just days before the official launch of new peace negotiations, and put the U.S., Israel's main ally, on the spot. In a carefully worded reprimand, Secretary of State Condoleezza Rice said the construction would "not help build confidence" for talks.

Israeli Cabinet minister Haim Ramon, a close ally of Prime Minister Ehud Olmert, countered that since Israel is willing, in principle, to hand over Arab neighborhoods in Jerusalem, it should be able to build in Jewish ones.

In any final peace deal, Har Homa and other Jewish neighborhoods in east Jerusalem _ home to some 180,000 Israelis _ are considered likely to remain in Israeli hands, possibly as part of a territorial exchange between the sides.

Other Israeli officials said the announcement was a misunderstanding _ a decision by low-level bureaucrats about which Olmert was only informed afterward.

But Palestinians say the timing is certain to undermine what little goodwill exists between the sides after years of violence and suspicion.

The plan for Har Homa was approved six months ago, said Zeev Boim, Israel's housing minister. And building there is like building anywhere in Israel, he insisted.

"There is no reason not to build in Har Homa, just as there is no reason not to build in Tel Aviv, in Haifa or in any other Israeli city," Boim said.