A meeting between Ehud Olmert, the Israeli Prime Minister, and Mahmoud Abbas, the President of the Palestinian Authority, failed yesterday to resolve a growing crisis over the construction of Jewish settlements that has stalled peace negotiations since the Annapolis summit last month.

The meeting at Mr Olmert’s Jerusalem residence was the first between the two leaders since the talks in Maryland, where they set the goal of reaching a statehood agreement before President Bush leaves office in January 2009.

The Palestinian negotiating team said that the peace talks had become contingent on one point – Israeli willingness to halt all settlement activity in the West Bank. While Israeli officials have announced that they would issue no new building tenders for construction in the settlements, they have allowed building to continue on all tenders that were issued in 2006 and the first quarter of this year.

Last week the Israeli Housing Ministry approved a new tender for 307 housing units in the southeast Jerusalem neighbourhood known to Israelis as Har Homa and to Palestinians as Jabal Abu Ghneim.

Saeb Erekat, a Palestinian negotiator, said: “By 2009 we want to have reached peace. This kills the credibility of the peace process.”

Israeli Housing Ministry officials confirmed that the decision to issue tenders was made by low-ranking ministry officials and that Mr Olmert was not informed of the decision beforehand.

As far as Israel is concerned, the neighbourhood is an integral part of unified Jerusalem, and not part of the territories. Palestinians, however, see any Israeli construction east of the green line, which marks Israel’s border before the 1967 Six-Day War, as an illegal land grab.

Israel’s Har Homa plan has drawn rare criticism from the United States, its key ally. Construction at the same settlement derailed a previous round of talks in 1997.

Mr Olmert said that Israel “will take no steps that will hurt our ability to arrive at final status negotiations with the Palestinians”, and added that Israel wanted to carry out said negotiations “under good will”.

Both sides have turned to the United States for intervention. The State Department said that Condoleezza Rice, the US Secretary of State, had called Mr Abbas and Mr Olmert and urged them to make progress toward an agreement.

Officials from the Palestinian and Israeli negotiating teams said that both sides hoped that Mr Bush’s visit to the region next month would push the process towards a breakthrough.

Israel has called on the Palestinians to meet their road map commitments to rein in militants in the West Bank and the Hamas-controlled Gaza Strip as a condition for a Palestinian state.

Hamas, which is not party to the talks, pronounced the meeting a waste of time. “Olmert and his Government continue their daily aggressions against our people, continue to build settlements, and don’t recognise Palestinian political and national rights,” the group said in a faxed statement.