United States President Barack Obama said Wednesday that there was no crisis in ties with Israel, despite a high-profile diplomatic feud over the Netanyahu administration's plans to build 1,600 homes in East Jerusalem.

"Israel is one of our closest allies, and we and the Israeli people have a special bond that's not going to go away," Obama said in an interview with Fox News.

"But friends are going to disagree sometimes," Obama said.

The United States had previously described as an "insult" Israel's decision to construct housing units in the neighborhood of Ramat Shlomo, announced during a visit to Israel last week by U.S. Vice President Joe Biden.

Interior Minister Eli Yishai gave approval for the construction hours after Biden spoke about Obama's commitment to Israel's security in the face of what both countries see as threats from Iran.

Obama said in the interview that he had sent Biden to the region at a moment when the United States was trying to restart talks between Israelis and the Palestinians.

"I specifically sent Vice President Biden to Israel to send a message of support and reassurance about my belief that Israel's security is sacrosanct and that we have a host of shared interests," Obama said. "There is a disagreement in terms of how we can move this peace process forward."

He added: "The actions that were taken by the interior minister in Israel weren't helpful to that process. Prime Minister Netanyahu acknowledged as much and apologized for it."

"What we need right now is both sides to recognize that it is in their interests to move this peace process forward."

Prime Minister Benjamin Netanyahu on Wednesday called the timing of the move a "bureaucratic mishap".

"This neighborhood is located five minutes from the prime minister's office," Netanyahu told Catherine Ashton, the European Union's foreign policy chief, in Jerusalem during her first official trip to the Middle East.

Because Ramat Shlomo is considered a Jewish neighborhood, the Jerusalem District Planning and Building Committee which approved the project did not consider its decision controversial, Netanyahu told Ashton.

U.S. Secretary of State Hillary Clinton last week demanded that Israel scrap the project and show commitment to U.S.-mediated peace talks with the Palestinians.

State Department Spokesman Mark Toner said late Wednesday said that Clinton was still awaiting Netanyahu's answer to the demands.

"We're still looking forward to a response. It hasn't happened yet," he said. "There hasn't been a call yet."

By the early hours of Thursday morning Netanyahu was still in talks with seven senior ministers over Israel's reply to Clinton.

A government source said it was possible that the 'forum of seven' would not complete its deliberations that night, and might continue discussions on Thursday.

During the meeting, Defense Minister Ehud Barak spoke by telephone with George Mitchell, the U.S. peace envoy to the Middle East, Haaretz learned.

Mitchell on Tuesday canceled a planned visit to Israel as a protest against the announcement on Ramat Shlomo but told Barak that he was now considering arriving in the country on Sunday. It was not clear if Barak offered any specific Israeli response to U.S. demands.

Toner said the United States was seeking commitments from both Israel and the Palestinians on restarting stalled peace talks.

"We're looking for steps that we think would demonstrate the commitment. I don't think there's any timeline on that response," he said "We're trying to keep the process moving forward."

Israel envoy: Don't let tensions hurt peace process

In an opinion piece published by The New York Times on Thursday, Israel's Ambassador to the United States Michael Oren urged the United States and Israel not to let the recent tensions affect the peace process.

Netanyahu's policy on construction in Jerusalem is no different than that of his predecessors, writes Oren.

"We should not, however, allow peace efforts, or the America-Israel alliance, to be compromised by Israel?s policy on Jerusalem," writes Oren. "That policy is not Mr. Netanyahu?s alone but was also that of former Prime Ministers Ehud Barak, Yitzhak Rabin, Shimon Peres and Golda Meir - in fact of every Israeli government going back to the city?s reunification in 1967.

"Consistently, Israel has held that Jerusalem should remain its undivided capital and that both Jews and Arabs have the right to build anywhere in the city," he writes."

The ambassador also reiterates in his peace Israel's commitment to seeing the peace process advance, and accuses the Palestinians of introducing new preconditions at a critical juncture in the renewal of talks.

"Despite these Palestinian actions, Israel wants to begin 'proximity talks' - indirect negotiations involving United States intermediaries - which we hope will lead to a direct dialogue and a historic and permanent peace," he writes. "But the only way to negotiate a peace agreement is to begin negotiations.

"Though Israel will always ultimately rely on the courage of its own defense forces, America?s commitment to Israel?s security is essential to give Israelis the confidence to take risks for peace," writes the ambassador.