Israel disclosed on Monday it would build 112 new homes in a Jewish settlement, a plan Palestinians said topped the agenda in talks they held with a U.S. envoy on restarting peace negotiations.

Saeb Erekat, the chief Palestinian negotiator, described the planned U.S.-mediated, indirect talks with Israel as a "last attempt" to save the Middle East peace process.

Both Israel and the Palestinians have agreed to so-called proximity talks, in a boost to U.S. President Barack Obama's quest to end decades of conflict. Negotiations have been suspended since December 2008.

U.S. envoy George Mitchell held talks in the West Bank city of Ramallah with Palestinian President Mahmoud Abbas following meetings with Israeli Prime Minister Benjamin Netanyahu in Jerusalem on reviving statehood deliberations.

No date was announced for a formal start, but expectations were high that U.S. Vice President Joe Biden, who began a visit to Israel and the West Bank on Monday, would do so.

In news that angered Palestinians, Israel said it approved building the 112 new Jewish homes in the Jewish settlement of Beitar Ilit.

It said the construction was part of a housing project that was not included in a partial West Bank settlement building freeze that Netanyahu announced in November under U.S. pressure.

The new homes, a second stage in the plan, were needed as a safety measure to deal with structural problems, Israel's Defence Ministry said.

Erekat said the settlement expansion was the first item on Abbas's agenda in his meeting with Mitchell, and it was too early to say exactly when the indirect talks with Israel would begin.

"The president said that if each round will include an announcement of settlement and unilateral steps ... this puts a question mark over all of the efforts we are undertaking," Erekat told reporters.

BORDERS

Many observers and politicians doubt the Israeli-Palestinian negotiations, in which Mitchell is widely expected to shuttle at least initially between Jerusalem and Ramallah, can succeed where years of talks have failed.

The Palestine Liberation Organisation endorsed the indirect talks on Sunday, following Arab League backing last week for four months of negotiations which the Palestinians say should focus on security and borders of a future state.

Abbas had demanded a complete halt to Israeli settlement building as a condition for resuming talks with Israel and has rejected its 10-month limited freeze as insufficient.

But the PLO and Arab League decisions gave the Western-backed leader political support for re-engaging with Israel without a blanket settlement moratorium.

Erekat said he hoped Abbas and Netanyahu would take the lead in the coming talks and reiterated the Palestinian outline for a peace deal -- a state in the West Bank and Gaza Strip along the lines in place before Israel captured the two territories in a 1967 war, "with agreed swaps".

Israel's previous prime minister, Ehud Olmert, had pursued a peace agreement under which land inside Israel would be transferred to a Palestinian state in exchange for major Jewish settlement blocs in the West Bank.

Netanyahu has not endorsed the concept of a territorial trade but has said he would be open, under a peace deal ending the Israeli-Palestinian conflict, to the creation of a demilitarised Palestinian state. (Additional reporting by Dan Williams and Ari Rabinovitch in Jerusalem, Nidal al-Mughrabi in Gaza and Tom Perry and Ali Sawafta in Ramallah; Editing by Ralph Boulton)