German Chancellor Angela Merkel and Prime Minister Benjamin Netanyahu have "agreed to disagree" over Israel's decision to move forward with planning and zoning in the E-1 region of the West Bank, the German premier announced Thursday.

But the issue continued to cause diplomatic fallout in other capitals, with one of Israel's best friends abroad, Canadian Prime Minister Stephen Harper, phoning Netanyahu on Wednesday to say that Canada can't support the decision to advance construction plans in E-1 - a corridor of land linking Jerusalem with the settlement of Ma'aleh Adumim. Harper is considered the foreign leader friendliest to Israel, and Canada was one of only eight countries to join Israel in opposing the Palestinians' bid for UN recognition as a nonmember observer state.

"The Palestinians' actions last week were very unhelpful to the cause of peace, and the Israeli response of settlement expansion is very unhelpful to the cause of peace," Canadian Foreign Affairs Minister John Baird told The Globe and Mail, after informing the Canadian daily of Harper's phone call.

Merkel made her announcement at a joint press conference with Netanyahu in Berlin yesterday.

"We've agreed to disagree over construction in the E-1 area," she said. "But that does not prevent us from agreeing over issues such as security."

Merkel said it was important for both Israelis and Palestinians to refrain from unilateral moves. But on E-1, "Israel has a different opinion, and it is a sovereign state," she said. "We can only express our opinion."

Netanyahu also used the press conference to explain his position. "All Israeli governments have built in the Jewish neighborhoods of Jerusalem and in what are called the settlement blocs, which are really suburbs of Jerusalem and Tel Aviv," he said, while every Israeli government has agreed that E-1 must become part of Israel under any final peace agreement.

On Wednesday night, Netanyahu met privately with Merkel at her office in Berlin. At the end of the three-hour meeting, which was scheduled to be only an hour and a half, officials in the prime minister's entourage described the atmosphere of the talks as positive. Netanyahu referred to Merkel after the meeting as a "true friend to Israel" and commented on the openness of their discussion.

Nevertheless, he told the German press that he and many other Israelis were "disappointed" with Germany's abstention in the UN vote on recognizing Palestine. German newspaper Die Welt published an interview with Netanyahu on Wednesday night under the headline "Netanyahu disappointed with Chancellor."

"I appreciated the support of Chancellor Merkel and the German government during the operation in Gaza," Netanyahu told the German paper. "At the same time, I would be disingenuous if I didn't tell you that I was disappointed, as were many people in Israel, by the German vote in the UN. I think that people understand that there is a special relationship between Germany and Israel."

Netanyahu told the paper he realized that Germany and other European countries voted as they did because they thought "it may advance peace but in fact this pushes peace backwards because it tells the Palestinians you can get international recognition and international legitimacy without making the necessary compromises for peace."

Also yesterday, South Africa and Greece joined the list of countries that have called in Israeli ambassadors for a rebuke over the E-1 decision. South Africa's Foreign Ministry said it also objected to Israel's decision to withhold hundreds of millions of shekels in tax revenues to the Palestinian Authority. Israel withheld the money to cover part of the PA's NIS 800 million debt to the Israel Electric Corporation. But Pretoria said that "no excuse" could justify the decision, as the lack of cash could harm the Palestinian population.

Foreign Minister Avigdor Lieberman, for his part, has canceled a planned visit to Georgia later this month over that country's support for the Palestinians' UN bid. Officially, the visit has merely been postponed, but a Foreign Ministry source attributed the delay to Georgia's vote - which is somewhat surprising, as no similar steps have been taken against other countries.