The newly boosted Palestinian Authority is planning a diplomatic campaign to isolate Canada in the Middle East, arguing Ottawa's vitriolic stand against upgraded UN status for Palestinians has disqualified it from any role in the peace process.

A United Nations vote of 138-9 in favour of granting the Palestinians "non-member observer state" status sparked celebration in the West Bank. But a day later, Israeli officials announced a decision to speed up plans to expand settlements in a politically sensitive area near Jerusalem.

In Canada, the Harper government temporarily recalled its ambassadors to the UN and the Middle East while it considers what to do next. The Palestinians made clear they are planning to take their own diplomatic measures.

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Saeb Erekat, the chief Palestinian negotiator, said Canada's decision to send Foreign Affairs Minister John Baird to vote and speak at the UN and the threats of reprisal measures have cast the Harper government as too extreme and partisan to play a role in the region. Voting against the resolution is one thing, he said, but Canada's approach is another.

"I believe this government is more Israeli than the Israelis, more settler than the settlers," he said in an interview with The Globe and Mail. "I think they have disqualified themselves from playing any role in the Middle East peace process."

Mr. Erekat, speaking just before leaving New York, said that "as soon as we get back tomorrow," senior Palestinian Authority officials will begin the process of trying to remove Canada as the so-called gavel-holder at the Refugee Working Group, a position that technically makes Canada the chair of international discussions on Palestinian refugees.

That step is mostly symbolic, since the working group has not held substantive talks for years. But Mr. Erekat also signalled that the Palestinian Authority wants neighbouring governments to respond – and it carries the implicit warning that Canada's own bilateral trade and diplomatic interests could be harmed.

He said Canada's campaign against the Palestinian resolution will also be placed on the agenda at a Dec. 9 meeting of foreign ministers of the Arab League. "Canada is hurting its own interests in the Arab world," he said.

It appears, however, that Canada is cooling its heated initial reaction. On Thursday, at the United Nations, Mr. Baird warned that Canada is considering "all available next steps." On Friday, however, he ruled out some of the most drastic measures.

He did announce that Canada's envoys to Israel, the West Bank and the UN are being temporarily recalled, to be consulted on what to do next, and that Ottawa is reviewing its relationship with the Palestinian Authority.

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However, he said Canada will not expel the Palestinian envoy in Ottawa, citing the need to continue dialogue. And he hinted Canada will not go so far as to cut off all aid to the Palestinian Authority, saying he had been impressed by the results the aid produced, while adding that the government will consider what to do about the aid when the five-year, $300-million package is up for renewal next year.

Mr. Baird said he will ask Canadian diplomats whether they expect Palestinian Authority President Mahmoud Abbas to use the new UN status to obtain membership in other UN agencies and the International Criminal Court. Israel has expressed concerns that the Palestinian Authority might launch a raft of war-crimes allegations if it obtained standing at the court.

Both Israel and the United States appear to be falling back to a new line in the sand, arguing they will use more punitive measures if the Palestinians try to obtain membership in the International Criminal Court.

Israel, which appears to have backed off from threats to cut revenue transfers to the Palestinian Authority, responded with plans to build 3,000 homes for settlers.

Citing "a senior diplomatic source," a Haaretz reporter said Prime Minister Benjamin Netanyahu soon would announce a plan to build the houses and to revive dormant plans to build in a part of the West Bank that would link Jerusalem to one of the territory's largest settlements, Ma'aleh Adumim, to the east.

Palestinians were incensed to learn that the Jerusalem-Ma'aleh Adumim corridor, known as E-1, was going to be filled.

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"Israel's announcement that it plans to colonize the E-1 area was expected. Israel has always punished Palestinians for demanding their rights," said Diana Buttu, a Canadian-born former legal adviser to Mr. Abbas.

"This time, however, Israel's plans are also taking aim at the Europeans and the U.S., who for over a decade have pressed Israel not to colonize this land because it will mark the death of the two-state solution."

The United States has long opposed construction in this precinct because it would cut off the northern West Bank centres of Ramallah and Nablus from the Palestinian centres in the south, Bethlehem and Hebron, making it very difficult for a future Palestinian state to function.

In the U.S., however, it appeared likely that Washington's disapproval of the Palestinian move to obtain "observer state" status would not be immediately followed by punishment for the Palestinian Authority, but new battle lines would be set.

A bill sponsored by New York Senator Charles Schumer, which appeared to be gaining support, would cut assistance to the Palestinian Authority only if it used the International Criminal Court to file charges against Israel.

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