JERUSALEM (Reuters) - Israel set free 26 Palestinian prisoners on Tuesday as part of U.S.-brokered peace efforts, after pledging to press ahead with plans to build more homes in Jewish settlements.

U.S. Secretary of State John Kerry, whose shuttle diplomacy led to a resumption of the negotiations in July after a three-year break, was due to return on Thursday to seek a framework agreement in talks that have shown few signs of progress.

Israel agreed to release 104 long-serving Palestinian prisoners - the latest group is the third of four to go free - as part of the U.S.-led efforts that coaxed Palestinian President Mahmoud Abbas back to the negotiations after a three-year break.

In tandem with the prisoner releases in the West Bank and Gaza Strip, Israel has announced new construction in settlements in occupied territory Palestinians seek for a state.

Most of the 26 inmates going free were convicted of killing Israelis and almost all were jailed before the first Israeli-Palestinian interim peace deals were signed 20 years ago.

Palestinians have jubilantly welcomed the return home of brethren they regard as national heroes. The families of Israelis they killed or injured have voiced anger and mounted unsuccessful court challenges against their release.

Last week, an Israeli official said Prime Minister Benjamin Netanyahu's government - which includes pro-settlement parties - would announce plans after the latest release to build 1,400 more homes for settlers in the West Bank.

Palestinians see the settlements, which most countries regard as illegal, as an obstacle to achieving a viable state in the West Bank and the Gaza Strip, with East Jerusalem as its capital.

Israel captured those territories in the 1967 Middle East war and pulled out of the Gaza Strip, now ruled by HamasIslamists opposed to the U.S. peace efforts, in 2005.

Palestinian officials have cautioned the settlement push could kill chances for a peace deal. Israel says the housing projects are in areas it intends to keep in any future agreement.

In another move that drew Palestinian anger, an Israeli ministerial committee on Sunday endorsed proposed legislation to annex an area of the West Bank likely to be the eastern border of a future Palestinian state.

The step, promoted by far-right members of Netanyahu's Likud party, could weigh on the peace negotiations. But centrist Justice Minister Tzipi Livni, Israel's chief negotiator, said she would use her powers to block the legislation from being voted on in Parliament.

(Writing by Ori Lewis; Editing by Bob Burgdorfer)