The Israeli prime minister, Binyamin Netanyahu, last night caved into US demands over the Middle East peace process, opening the way for a resumption of talks with the Palestinians.

It was a humiliating climbdown for Netanyahu after a week of pressure from the Barack Obama administration.

Netanyahu, in a telephone call to the US secretary of state, Hillary Clinton, who was in Moscow for Middle East talks, agreed to various demands she had set out last Friday.

In a statement from his office, he said he proposed, as Clinton had demanded, "confidence-building steps" that would make it easier for the Palestinians to join the talks. He did not specify what these would be but these could include easing Israeli roadblocks in the West Bank, the withdrawal of Israeli troops from more parts of the West Bank and the release of Palestinian prisoners.

He did not announce, as the US had demanded, a freeze on the construction of Jewish homes in Ramat Shlomo, in East Jerusalem, the key point at issue.

But diplomats in Washington, Moscow and Jerusalem said Netanyahu had given a private promise that there will be a temporary freeze on any new construction. The work, while not cancelled, is to be postponed for several years.

The Israeli ambassador to the US, Michael Oren, told the Washington Post: "The goal of both sides at this point is to put this behind us, and go forward with the proximity talks as quickly as possible."

The concessions bring to an end a rare clash between the US and Israel which began early last week when the US vice-president, Joe Biden, made a visit to Israel to coincide with what he hoped would be a resumption of peace talks.

But during his visit Israel announced a plan to build 1,600 Jewish homes in East Jerusalem. The Palestinians promptly pulled out off the proposed talks and the US described the Israeli announcement as a snub and an insult.

Clinton last Friday had a tense 41-minute phone call with Netanyahu expressing US anger and set out her demands: confidence-building measures, a moratorium on new construction in East Jerusalem, and a promise that the resumption of negotiations would be on matters of substance, not just talks about talks.

There was no indication last night whether Netanyahu had agreed to the latter, but it is unlikely, given the events of last week, that the US would have settled for anything less.

Diplomats said that some of the concessions by Netanyahu were being made public and others were being kept private, partly as a face-saving exercise for the Israeli prime minister.

The climbdown is politically awkward for Netanyahu, coming only days after he publicly said that no Israeli government in the past 42 years had given a promise not to build in East Jerusalem, and he will face criticism, particularly from his rightwing coalition partners.

He held a long meeting with cabinet colleagues on Wednesday night to discuss the concessions he would have to make.

Obama and Clinton stand to gain from the Israeli retreat, which will heighten their reputation among the Palestinians and in the Arab world. Obama and Clinton were left looking weak after a similar stand-off with Israel last September when peace talks failed to get under way.

The US Middle East envoy, George Mitchell, had cancelled a trip to Israel earlier this week in protest, but is to resume his visit on Sunday. Clinton is to see Netanyahu in Washington next week.

A US state department spokesman, PJ Crowley, said Clinton and Netanyahu had discussed "specific steps" to improve the outlook for Middle East peace talks. Netanyahu's spokesman, Nir Chefetz, said the prime minister had proposed "mutual confidence-building steps" that both Israel and the Palestinians could take.

Last night Israel retaliated for a Palestinian rocket attack on Israel that killed a Thai agricultural worker. Israeli planes struck at least two targets in Gaza, officials and witnesses said.