Officials from both sides said Monday they would meet this week in Jerusalem to discuss final status issues for the first time since their negotiations were officially re-launched last month at the Annapolis Middle East conference.

Palestinian officials said, however, that Israel must first declare an end to settlement activities in the West Bank and East Jerusalem – a demand that is not likely to be met before the negotiators sit down together Wednesday.

Last week, Israel invited bids for 307 new housing units in Jebel Abu Ghneim, or Har Homa, in East Jerusalem, which Israel captured in 1967 and which the Palestinians and Arabs seek as the capital of a future Palestinian state that is expected to be established in the aftermath of the final negotiations.

The Israeli move has drawn much criticism from across the world, including peace co-sponsors Washington and the United Nations, witnesses to a high-level Palestinian-Israeli vow to implement the international Quartet's 2003 road map, which called on the Palestinians to impose law and order in the occupied territories and for Israel to freeze the construction of Jewish settlements.

European Union External Relations Commissioner Benita Ferrero-Waldner said Monday she was "very much concerned" at Israel's decision to expand the settlement. After meeting with Palestinian Prime Minster Salam Fayyad in Brussels, she added that both the United States and United Nations "requested explanations from the Israeli government on the building permits."

Fayyad told a joint press conference with the EU commissioner that the Israeli move defies the "letter and spirit" of the Annapolis conference, insisting the settlement activities "have to stop."

But Israeli housing minister Zeev Boim said Saturday that the settlement building at Har Homa would go ahead "in response to the needs of the people." Israel considers all of Jerusalem as its capital and has insisted that construction there does not constitute settlement expansion because it annexed the Arab eastern section shortly after the 1967 war.

The Palestinian Authority has in recent weeks deployed hundreds of security forces in the northern West Bank to reign in lawlessness and armed factions in an attempt to demonstrate it is living up to its obligations in line with the road map.

But the P.A.'s intention to sit down with Israelis this week despite the new settlement bids has raised loud domestic and international Arab opposition and given Hamas added fuel to support its own stand that negotiations with Israel is futile.

Hamas, the Palestinian Islamic group that forcibly ousted the Fatah-dominated P.A. from the Gaza Strip in June, has described the Israeli settlement decision as a "slap on the faces of all those who attended" Annapolis, which brought together over 50 nations and organizations, including Arab countries that do not recognize Israel.

Arab diplomats privately told the Middle East Times that Israel was making it very difficult for Arab governments to sell the idea of making peace with Israel as it continues to take what they said was unilateral action in the Palestinian territories, especially in East Jerusalem.

East Jerusalem's mainstream al-Quds Arabic daily, close to Fatah, said in its editorial Monday the Palestinian and Arab leaders "know the questions raised in the Arab and Palestinian street on the usefulness of heading to the negotiations at a time when Israel does not respect its obligations and exercises what is contrary to the slogans [of the peace process]."

Arab analysts said the Israeli move has put Palestinian President Mahmoud Abbas and his authority in an awkward position and has weakened the Palestinian negotiators even before they meet with their Israeli counterparts.

Top Palestinian negotiator Saeb Erekat said if the decision to expand the settlement is implemented, it "will strike a heavy blow to the peace process," according to AFP news agency.

The issue of the Jewish settlements in the West Bank and East Jerusalem is only one of a number of tough final status issues that will be negotiated by sub-committees that the two sides are set to form at this week's meeting.

Israeli Prime Minister Ehud Olmert and Abbas vowed at Annapolis to reach a final agreement by the end of 2008, before U.S. President George W. Bush's term expires. Observers expected a rocky road for negotiations at best, but the settlement expansion surprise has dampened already low expectations that the target deadline will be met.