U.S. Defense Secretary Leon Panetta has criticized U.S. lawmakers for suspending $200 million in aid slated to fund development projects in the Palestinian territories.

Panetta said Monday at a news conference in Tel Aviv with Israeli Defense Minister Ehud Barak that this is "no time to withhold those funds." He said it is a "critical" moment in the region, as U.S. officials continue to urge Palestinians and Israelis to negotiate a peace deal.

The U.S. State Department said the Obama administration is in "intensive" discussions with key lawmakers who put a hold on the money. The Palestinian government relies on foreign donors to help make up its yearly budget.

Officials from the U.S. government's foreign aid agency (USAID) confirmed that some programs were affected by the congressional hold, but they did not give details. Palestinian officials denounced the move as counterproductive to peace, saying it would not deter them from seeking full U.N. membership for a Palestinian state.

U.S. lawmakers froze the money in response to the Palestinian Authority's bid for statehood recognition over the objections of the U.S. and Israel, who say direct negotiations are the only path to Mideast peace.

Earlier Monday, Panetta held separate talks with Israeli Prime Minister Benjamin Netanyahu and Defense Minister Barak. He also met with Palestinian President Mahmoud Abbas and Prime Minister Salam Fayyad. He is scheduled to travel to Egypt on Tuesday.

Panetta urged both sides to take "bold action" to move toward a two-state solution, saying there is "no alternative to negotiations" between Israelis and Palestinians.

His comments came as suspected Jewish extremists torched a mosque in a Bedouin village in northern Israel. Police have suspected Jewish radicals in other mosque fires this year.

Netanyahu and Israeli President Shimon Peres both angrily condemned what police say was a revenge attack. A Jewish West Bank settler and his infant son were killed last month in a car crash caused by Palestinian stonethrowers.

Israel has formally accepted an international plan for restarting negotiations, but the immediate resumption of talks appears unlikely as the two sides continue to differ over terms of the proposal.

Netanyahu Sunday welcomed "the Quartet's call for direct negotiations without preconditions." He said Israel has concerns about the plan that it will raise at the "appropriate time." He did not elaborate.

The Quartet of Middle East peace mediators - the U.S., EU, U.N. and Russia - issued a declaration last month calling for negotiations to resume "without delay or preconditions."