A letter that President Bush personally delivered to then-Israeli Prime Minister Ariel Sharon four years ago has emerged as a significant obstacle to the president's efforts to forge a peace deal between the Israelis and Palestinians during his last year in office.

Ehud Olmert, the current Israeli prime minister, said this week that Bush's letter gave the Jewish state permission to expand the West Bank settlements that it hopes to retain in a final peace deal, even though Bush's peace plan officially calls for a freeze of Israeli settlements across Palestinian territories on the West Bank. In an interview this week, Sharon's chief of staff, Dov Weissglas, said Secretary of State Condoleezza Rice reaffirmed this understanding in a secret agreement reached between Israel and the United States in the spring of 2005, just before Israel withdrew from Gaza.

U.S. officials say no such agreement exists, and in recent months Rice has publicly criticized even settlement expansion on the outskirts of Jerusalem, which Israel does not officially count as settlements. But as peace negotiations have stepped up in recent months, so has the pace of settlement construction, infuriating Palestinian officials, and Washington has taken no punitive action against Israel for its settlement efforts.

Israeli officials say they have clear guidance from Bush administration officials to continue building settlements, as long as it meets carefully negotiated criteria, even though those understandings appear to contradict U.S. policy.

Many experts say new settlement construction undermines the political standing of Palestinian Authority President Mahmoud Abbas -- who is to meet with Bush today at the White House -- and adds to Palestinian cynicism about the peace process. Palestinians view the settlements as an Israeli effort to claim Palestinian lands, and in a meeting yesterday with Rice, Abbas said settlement construction was "one of the greatest obstacles" to a peace deal.

U.S. and Israeli officials privately argue that Israel has greatly restricted settlement growth outside the settlements it hopes to retain in a peace deal with the Palestinians, and Olmert has said Israel has stopped building new settlements and confiscating Palestinian lands.

Housing starts -- not counting the Jerusalem settlements -- have declined 33 percent since 2003, according to the Israeli Central Bureau of Statistics. But officials say it is politically damaging for Olmert to admit that, so instead he publicly emphasizes that he is adding to the settlements, which now house about 450,000 Israelis.

"It was clear from day one to Abbas, Rice and Bush that construction would continue in population concentrations -- the areas mentioned in Bush's 2004 letter," Olmert declared in an interview with the Israeli newspaper Yedioth Ahronoth, published Sunday. "I say this again today: Beitar Illit will be built, Gush Etzion will be built; there will be construction in Pisgat Ze'ev and in the Jewish neighborhoods in Jerusalem," referring to new settlement expansion plans. "It's clear that these areas will remain under Israeli control in any future settlement."

In a key sentence in Bush's 2004 letter, the president stated, "In light of new realities on the ground, including already existing major Israeli populations centers, it is unrealistic to expect that the outcome of final status negotiations will be a full and complete return to the armistice lines of 1949."

In a companion letter to "reconfirm" U.S.-Israeli understandings, Weissglas wrote Rice that restrictions on the growth of settlements would be made "within the agreed principles of settlement activities," which would include "a better definition of the construction line of settlements" on the West Bank. A joint U.S.-Israeli team would "jointly define the construction line of each of the settlements."

Weissglas said that the letter built upon a prior understanding between then-Foreign Minister Shimon Peres and then-Secretary of State Colin L. Powell, which would allow Israel to build up settlements within existing construction lines. But Powell denied that. "I never agreed to it," he said in an e-mail.

Daniel Kurtzer, then the U.S. ambassador to Israel, said he argued at the time against accepting the Weissglas letter. "I thought it was a really bad idea," he said. "It would legitimize the settlements, and it gave them a blank check." In the end, Kurtzer said the White House never followed up with the plan to define construction lines. "Washington lost interest in it when it became clear it would not be easy to do," he said.

National security adviser Stephen J. Hadley, at a news briefing in January, suggested that Bush's 2004 letter was aimed at helping Sharon win domestic approval for the Gaza withdrawal. "The president obviously still stands by that letter of April of 2004, but you need to look at it, obviously, in the context of which it was issued," he said.

Weissglas said that in 2005, when Sharon was poised to remove settlers from Gaza, the Bush administration made a secret agreement -- not disclosed to the Palestinians -- that Israel could add homes in settlements it expected to keep, as long as the construction was dictated by market demand, not subsidies. He said the agreement was necessary because Sharon needed the support of municipal leaders in the main West Bank settlements. The settlement leaders, he said, focused on the "inner contradiction" of Bush's letter, mainly that it made no sense to have a settlement freeze in places that Bush said would become part of Israel.

Weissglas said he then negotiated a "verbal understanding" with deputy national security adviser Elliott Abrams that would permit new construction in those key settlements; Rice and Sharon then approved the Weissglas-Abrams deal. "I do not recall that we had any kind of written formulation," Weissglas said.

"There is no understanding," said White House National Security Council spokesman Gordon Johndroe.

Indeed, as settlement starts soared after the Middle East peace conference in Annapolis in November, Rice said "the United States doesn't make a distinction" among settlement locations.

Powell said that in 2004, he did not anticipate that Bush's letter would be perceived as a green light by Israel for adding to the settlements. "I consistently spoke against settlement growth, but as you know all I could do is talk against it," Powell said. "There would be no consequences and there still aren't."