Israel insisted on Friday it would not change its policy of building homes in East Jerusalem, keeping the Jewish state at odds with Washington on how to renew stalled peace talks with Palestinians.

The statement on Jerusalem came as Prime Minister Benjamin Netanyahu convened senior cabinet ministers to consider confidence building steps for reviving negotiations, as proposed by U.S. officials while Netanyahu was in Washington this week.

"Israeli construction policy in Jerusalem has remained the same for 42 years and isn't changing," a written statement from Netanyahu's spokesman, Nir Hefez, said, suggesting Israeli cabinet ministers would not budge on that particular policy.

The Obama administration has been pressing Israel to halt settlement construction in East Jerusalem, an issue that created new friction this month when a plan to build 1,600 more housing units was published while Vice President Joe Biden was visiting.

Sparring over settlements risks jeopardising Israel's vital security ties with the United States, its biggest ally. However, Netanyahu has to balance these concerns with the possibility that his pro-settler government may fall apart should he bow to U.S. demands.

Israel captured East Jerusalem in a 1967 war, and annexed it as part of its capital in a move not recognised internationally. Palestinians want East Jerusalem as capital of a future state they seek in the West Bank, land Israel also occupied by Israel.

Palestinians also insist settlement must cease totally before peace talks stalled since December 2008 may resume.

The West has long objected to Israeli construction of Jewish settlements in land Palestinians seek for a state, and the issue again dogged Netanyahu's talks with President Barack Obama on Wednesday as they sought a way to renew Middle East diplomacy.

UNDERSTANDING ON JERUSALEM?

Hefez said Netanyahu and Obama had reached a "list of understandings" in the talks on Wednesday, although some disagreements remained.

He said they had an understanding "based on the principle that on the one hand construction policy in Jerusalem doesn't change, and on the other, Israel is ready to take steps to move the diplomatic process".

Later Hefez clarified that he had not meant to say Washington had agreed to Israel building in East Jerusalem, but to stress Israel's own policy on the issue.

In a statement to Reuters, Hefez said what he had told the radio "was related only to Israel's position and did not relate at all to the American position".

Netanyahu's office said he would on Friday "present to the forum of seven (ministers) the progress on a list of issues in the diplomatic contacts he held in the United States in order to make progress in the peace process".

It was not clear if the inner cabinet would make any decision by close of business on Friday, the Jewish sabbath, or whether it would hold further discussions before the long Passover holiday which starts on Monday evening.

"There is no deadline," a cabinet spokesman told Israel Radio.