Israel's Housing Ministry has drawn up a preliminary proposal to build new homes on occupied land near Jerusalem but Prime Minister Ehud Olmert's office said on Wednesday the plan has not been authorised.

The issue of Israeli settlement building in the Jerusalem area has clouded renewed peace talks between Israel and the Palestinians launched at a U.S.-sponsored conference last month.

Senior Palestinian negotiator Saeb Erekat said Israeli settlement expansion will "destroy the peace process and must be stopped". Israeli and Palestinian negotiating teams plan to hold their second round of talks on Dec 23 or 24.

Israeli Construction and Housing Minister Zeev Boim played down the proposal to build new homes near what Israel refers to as Atarot and the Palestinians call Qalandia in the West Bank.

The area in question is on the outskirts of Arab East Jerusalem whose future is to be decided in final-status talks between Israel and the Palestinians.

Disputes over settlements and Jerusalem, which Israel wants as its undivided capital and where Palestinians want East Jerusalem as capital of a Palestinian state, are central to the negotiations President George W. Bush hopes can be concluded before he steps down in January 2009.

Boim told Army Radio the housing proposal was only in the conceptual stage. A senior Israeli official said the Housing Ministry has "all sorts of contingency plans" that go nowhere.

Olmert's office distanced itself from the proposal.

"Nothing has been decided and nothing has been authorised," said Mark Regev, Olmert's spokesman.

The Palestinians are already protesting Israeli plans to build new homes at a settlement near Bethlehem known to Israelis as Har Homa and the Palestinians as Abu Ghneim.

Israeli Vice Premier Haim Ramon, a close Olmert confidant, criticized the draft Atarot-Qalandia proposal, suggesting it was conceived by low-level ministry officials.

"These steps are unnecessary at this stage ... The road to building a neighborhood like this is very long, and these things are not helping negotiations," Ramon told Israel Radio.

Erekat said he spoke by phone to representatives from the Quartet of Middle East mediators -- the United States, the European Union, Russia and the United Nations -- and asked them to put pressure on Israel to halt all settlement activity as called for under the long-stalled 'road map' peace plan.

The road map calls for Israel to halt all settlement activity, including so-called natural growth, and for the Palestinians to rein in militants.