Theconfirmation of an Israeli plan to build 740 apartment units in areas the Palestinians view as their own will complicate planned Mideast peace talks, officials and observers warned Sunday.

The Israeli government plans to allocate $25 million to build 500 new units in East Jerusalem and240 nearby in theWest Bank,Rafi Eitan, the cabinet minister for Jerusalem affairs, said Sunday.

Palestinian Authority President Mahmoud Abbas, whose Fatah partycontrols the West Bank,said building the apartments will breach Israel's agreement to halt construction while the two sides try and work out a peace deal.

"We can't understand these settlement activities at a time we're talking about final status negotiations," Abbas said.

Reporting from Jerusalem, the CBC's Peter Armstrong said "this will undoubtably cloud the new negotiations." Palestinians are "outraged" about the building, and the U.S. has already expressed "serious objections" to settlement expansions, he added.

Israel and the Palestinians represented by Abbas agreed in November torevive peace talks, with Abbas and Israeli Prime Minister Ehud Olmert meeting every two weeks.

But Israel is also angry with the Palestinians, complaining that they have not stopped attacks on Israeli territory. Rockets are regularly fired into southern Israel from Gaza, which has been under the control of Hamas since gunmen from the group ousted their Fatah counterparts in June.

Israel has responded by sending soldiers into Gaza, and on Sunday, Olmert said Israel will continue to battle Hamas.

"There is no other way to describe what is happening in the Gaza Strip except as a true war between the Israeli army and terrorist elements," he said, rulingout negotiations with Hamas.

Hamas won more seats than the long-dominant Fatah inthe 2006 Palestinian Authority election, although Abbas continued on aspresident of the Palestinian Authority. However, Hamas was eventuallyforced to form a coalition government with Fatah because of renewed violence and a Western-led boycott that had shut off billions of dollars in aid to the Palestinians.

After Hamas took over Gaza, Abbas dissolved the tenuous Hamas-Fatah government and formed a new one that Hamas refuses to recognize.