Prime Minister Ehud Olmert of Israel on Sunday rejected overtures by Hamas, the militant Islamic group that rules Gaza, for discussions about a temporary cease-fire.

At the same time, Mr. Olmert’s government raised the ire of Palestinian representatives from the West Bank, with whom Israel is embarking on negotiations for a permanent peace, by seeking budget approval to build more housing for Jewish residents in areas that the Palestinians claim for their future state.

Israeli officials said a Housing and Construction Ministry budget proposal for 2008 included plans to build 500 apartments in Har Homa, a Jewish development in a hotly disputed part of East Jerusalem, and 240 apartments in Maale Adumim, the largest Jewish settlement in the Israeli-occupied West Bank with a population of more than 30,000.

Israeli officials tried to play down the significance of the request. Mark Regev, a spokesman for Mr. Olmert, said that the budget still had to be approved by Parliament, and that “there have been no new decisions authorizing building in Maale Adumim.” It was unclear whether the budget request was for new projects that had not yet been approved or for units already approved but not yet built.

Either way, the action is likely to cast a pall over a meeting of the Israeli and Palestinian negotiating teams set for Monday, the second since last month’s American-sponsored peace conference in Annapolis, Md.

The chief of the Palestinian negotiating team, Ahmed Qurei, issued a statement saying the Annapolis meeting and the ensuing negotiations toward an accord would have “no meaning” if Israel continued its settlement activities. He added that the Palestinians would raise the issue with President Bush during his visit to the region in January.

Referring to the Gaza issue, Mr. Olmert said at the start of the weekly cabinet meeting that “counterterrorist operations will continue as they have for months” in response to the continued rocket fire directed at Israel from the Gaza Strip.

At least five rockets were launched from Gaza on Sunday, an Israeli Army spokesman said. One hit a factory in the industrial zone of Ashkelon, a large city in southern Israel. Another hit a building in the Israeli border town of Sderot. Both caused damage but no casualties.

Before dawn on Monday, an Israeli airstrike killed two Hamas militants and wounded another two in the Gaza Strip as they were traveling in a car near the border fence with Israel, Reuters reported.

Ismail Haniya, the leader of the Hamas government in Gaza, had expressed a willingness, in a telephone call to an Israeli television reporter last week, to enter into talks with Israel for a mutual cease-fire. But Mr. Olmert said that Israel had “no interest in negotiating with elements” that did not fulfill the internationally approved conditions of recognizing Israel and renouncing violence.

Mr. Olmert also seemed to oppose any lull in the fighting based on an informal understanding, describing the hostilities in Gaza as “a true war” between the Israeli military and “terrorist elements.”

Defense Minister Ehud Barak also ruled out talks with Hamas, but suggested that if Hamas successfully stopped the rocket fire, Israel might reciprocate. Mr. Barak was quoted by the Israeli news media as telling the cabinet, “If they stop firing, we won’t be opposed to quiet.”

But a Hamas spokesman, Ismail Radwan, said, “The Palestinian people have a right to continue resistance.”

Khaled al-Batch, a high-ranking official of Islamic Jihad, a militant group that has been firing most of the rockets lately, said his group would be willing to talk about a period of calm only after Israel had “paid for its war crimes” in blood.

Last week, the Israeli military killed at least eight Islamic Jihad militants, including a top commander of the armed wing. The Israeli security cabinet on Sunday allocated just over $200 million for the development of an antimissile system capable of knocking out short-range rockets like those fired from Gaza and, eventually, longer-range rockets like Katyushas. Thousands of Katyushas were fired at Israel from Lebanon during the 2006 summer war.

With regard to the budget proposal for additional housing units in East Jerusalem and the West Bank, Israel and the Palestinians have committed to fulfill the first phase of the road map, a dormant 2003 peace plan that calls for the Palestinians to halt all violence, and the Israelis to cease all settlement construction.

Mr. Olmert has pledged not to build new settlements or to expropriate additional land. But Israel has always reserved the right to build in major settlement blocs like Maale Adumim, which it intends to keep as part of any permanent deal with the Palestinians, and Israel contends that Jerusalem has a separate status.

Har Homa, known to the Palestinians as Jebel Abu Ghneim, was established in the late 1990s in an area of Jerusalem annexed by Israel after the 1967 war.

Days before the first meeting of the negotiating teams in December, the Israeli government put out a request for bids for the construction of 307 apartments in Har Homa. In an unusually forthright condemnation, Secretary of State Condoleezza Rice said the construction would “not help build confidence” for peace talks.

After the Dec. 12 meeting, the Palestinian negotiators said they expected Israel to present answers at the next meeting as to whether it was ready to stop settlement construction.