MARRAKECH, Morocco -- The Obama administration's drive for Middle East peace risked a major setback as Arab nations warned of "failure" after a surprise U.S. shift away from insisting on a total freeze of Israeli settlement-building in disputed areas ahead of peace talks.

A furor in Arab capitals forced U.S. Secretary of State Hillary Clinton to issue a carefully worded statement from Morocco on Monday, asserting that U.S. policy on the settlement issue hadn't changed. That didn't damp the criticism.

"The Americans couldn't bring something serious" on the settlement issue, said Amr Moussa, secretary-general of the Arab League and an Egyptian diplomat. "I'm really afraid we're about to see failure....Failure is in the atmosphere."

The disquiet was sparked by comments Mrs. Clinton made over the weekend in Jerusalem. She lauded Israeli Prime Minister Benjamin Netanyahu's commitment to a partial freeze of building in the West Bank and East Jerusalem, calling it an "unprecedented" move toward peace that should bring Palestinians to the negotiating table.

The Obama administration had repeatedly described a full freeze as critical to creating the conditions for progress on peace.The White House's point man on the Middle East peace process, former Sen. George Mitchell, has been seeking to get a complete settlement freeze in exchange for Arab governments taking early steps to normalize their relations with Israel, such as establishing trade and telecommunications links.