Israeli Prime Minister Benjamin Netanyahu said on Tuesday Middle East peace talks could be delayed for another year unless Palestine dropped their demand for a full settlement freeze which U.S. and many Western states have also seen as a key obstacle for mutual talks.

The Palestinians retreated from their agreement to begin indirect, U.S.-mediated peace negotiations with Israel two weeks ago after it announced plans to construct 1,600 homes for Jews in an area of the occupied West Bank annexed to Jerusalem.

The United States and Israel have been at loggerheads after Netanyahu's government announced the plan, embarrassing visiting U.S. Vice President Joe Biden and spurring Palestinian President Mahmoud Abbas to threaten to pull out of indirect talks that had only just been launched.

U.S. SEcretary of State Hillary Clinton called the announcement "insulting" and demanded that Netanyahu outline specific steps to restore confidence in the negotiation process.

Face-to-face peace talks have been suspended since December 2008 when Israel launched a massive attack on Gaza in which 1434 Palestinians were killed.

The new housing project also touched off the most serious spat between Israel and Washington since U.S. President Barack Obama took office last year.

Netanyahu made his comments at a meeting on Capitol Hill with leading Democrats and Republicans several hours before he was due to hold low-profile White House talks with Obama.

Israeli officials dismissed Palestinian concerns over Israeli settlement in and near East Jerusalem, territory Israel captured along with the West Bank in the 1967 Middle East war.

Palestinians want East Jerusalem as the capital of a state they seek in the West Bank and the Gaza Strip.

Reuters