The Israeli prime minister, Ehud Olmert, last night refused to rule out further settlement building in East Jerusalem and parts of the West Bank, highlighting the deep gulf between Israel and the Palestinians that confronts George Bush on his first visit to Israel and the West Bank as president.

Against a backdrop of bristling security that accompanied the presidential visit, the Israeli prime minister said the US and the Palestinians knew there was an Israeli "moratorium" on new settlements and on the new expropriation of Palestinian land in the occupied territories.

But he added: "We have made it clear that Jerusalem as far as we are concerned is not in the same status and they know that the population centres are not in the same status. There might be things that will happen in the population centres or in Jerusalem which they may not be in love with but we will discuss them."

Olmert's comments exposed the schism that divides Israelis and Palestinians as they attempt to renew serious peace negotiations. The presence of Jewish settlements in occupied Palestinian territory stands at the heart of the conflict and Olmert's position puts him at odds with some in the US administration who have spoken out against recent settlement growth, particularly in East Jerusalem.

This was the first visit Bush has made to Jerusalem since he became president seven years ago and brought with it a vast security effort. More than 10,000 Israeli police officers were deployed and major roads in the city centre were shut. Crossings in and out of the West Bank were closed for the 48-hour visit.

The two leaders exchanged gifts, with Bush presenting his soccer-mad counterpart with a football bearing images of the Israeli and American flags, a sports bag and cufflinks. In return, and perhaps fearing Bush may not find the Middle East again, Olmert presented the US president with a GPS navigation system - only this one was for bikes and included trail maps around his ranch in Texas and Israeli biking routes. He also gave Bush, a keen cyclist, an Israeli national cycling team suit, with "George W. 43" embroidered on the back, and a hydration backpack.

The Bush visit is confronting the disappointing aftermath of the peace conference in Annapolis, Maryland, that he hosted six weeks ago. The talks were to have launched a new round of diplomacy, but there has been little progress. Not long after Annapolis the Israeli housing ministry announced tenders for 300 new homes in Har Homa, a settlement in East Jerusalem near the Palestinian city of Bethlehem.

The Har Homa announcement, which has been followed by reports of two more new settlements planned in East Jerusalem, met with American criticism. The US "road map" calls on Israel to freeze "all settlement activity".

"Har Homa is a settlement the United States has opposed from the very beginning," the US secretary of state, Condoleezza Rice, who travelled with Bush to the Middle East, told the Jerusalem Post newspaper yesterday. She said Washington did not see a difference between settlements in East Jerusalem and the West Bank. "The United States doesn't make a distinction," she said.

Today more than 450,000 Israelis live in settlements beyond Israel's 1967 borders, on Palestinian land captured during the six-day war. Israel insists it has sovereignty over East Jerusalem, although its annexation has not been recognised internationally, and it defends building in the major settlement blocs by saying Israel intends to keep them in any future peace agreement.

Yet Olmert said that during his meeting with Bush he was not asked to make any new commitments on the peace process. Bush did say, though, that the "illegal outposts", which are settlements that do not even have official Israeli sanction, had to be removed, again a road map requirement.