U.S. Secretary of State Condoleezza Rice (L) and Palestinian President Mahmoud Abbas attend a joint news conference in Amman March 31, 2008. REUTERS/Ali Jarekji

AMMAN (Reuters) - U.S. Secretary of State Condoleezza Rice said on Monday Israel must stop expanding Jewish settlements but voiced confidence peace talks were on track despite an Israeli announcement of a new housing project.

"We continue to state America's position that settlement activity should stop, that its expansion should stop -- that it is indeed not consistent with 'road map' obligations," Rice said after the Jerusalem municipality announced the project.

The U.S.-backed road map, at the heart of the first Israeli-Palestinian peace negotiations in seven years, requires the Jewish state to halt all settlement activity in the West Bank and obliges Palestinians to rein in militants.

Despite U.S. concern that settlement building could derail peace efforts, Israel's Jerusalem municipality unveiled a plan to build 600 houses in Pisgat Zeev, a settlement in an area of the occupied West Bank that Israel considers part of the city.

Israel widened Jerusalem's boundaries after capturing the eastern part of the holy city in the 1967 war. Israel considers all of Jerusalem its capital. Palestinians want East Jerusalem as the capital of a future state in the West Bank and Gaza.

Casting a pall over the U.S.-sponsored peace talks, Israel has in recent months announced plans to build hundreds of houses for Jews in and around Arab East Jerusalem.

Asked about the Pisgat Zeev plan, Nabil Abu Rdainah, a senior aide to Palestinian President Mahmoud Abbas, said: "This action is condemned. Israel is deliberately placing obstacles in Rice's path."

A report by Israel's Peace Now group said there had been a surge this year in new projects on occupied land in and around Jerusalem. Overall, it said building work was under way in 101 settlements on the West Bank.

At a news conference in Amman with Abbas as she wrapped up three days of talks in the Jordanian capital and in Jerusalem, Rice said she was very impressed by the work Palestinian and Israeli negotiators had done so far.

An Israeli-Palestinian agreement before U.S. President George W. Bush leaves office in January, she said "is a goal that we can reach".

Abbas likewise sounded optimistic despite differences with Israel over what the outcome of the negotiations should be.

"I am confident, God willing, we will reach a comprehensive peace in 2008," Abbas said, adding he would next meet Israeli Prime Minister Ehud Olmert on April 7.

NOT HIDING ANYTHING

Israeli officials say the goal of the talks is to reach understandings setting out the shape and structure of a future Palestinian state rather than a comprehensive peace agreement this year that would be implemented.

In parliament on Monday, Olmert said Israel had made no secret of the fact that it intended to continue building in what he called Jewish neighborhoods of East Jerusalem and in West Bank settlements it intends to keep in any peace deal.

"These are negotiations that are being conducted sincerely because we are not trying to hide anything," said Olmert, referring to talks with Abbas's Palestinian Authority.

There has been no visible progress in the discreet peace talks led by Israeli Foreign Minister Tzipi Livni and former Palestinian Prime Minister Ahmed Qurie on how to solve the six-decade conflict.

"The American follow up (on the talks) has shown that they are serious. They have expressed their willingness to help both sides to reach an agreement in any way they can," Qurie said.

An Israeli military official said Israel had removed one West Bank checkpoint on Monday, keeping a promise to Rice to ease restrictions on Palestinian travel in the occupied territory. It has also pledged to remove 50 "dirt roadblocks".

U.S. officials said Rice's trip was designed to gauge how much progress could be made in the peace talks and on practical steps to help the Palestinians before Bush's visit in May to mark the 60th anniversary of Israel's founding.

A senior Israeli official said Rice was testing the water to see if a draft declaration or a memorandum of understanding could be presented as an interim "achievement" when Bush returns. Rice declined to comment on this, saying her focus was on achieving a peace agreement by the end of the year.

Olmert's government could unravel if talks focus on the thorny issue of Jerusalem, and Abbas's authority extends only to the occupied West Bank. Islamist Hamas, officially committed to Israel's destruction, seized the Gaza Strip in June.

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