Israel's Haaretz daily reported Wednesday that the Israeli Housing Ministry has authorized the construction of 10,000 to 15,000 housing units in what the Palestinians call Qalandia and the Israelis refer to as Atarot.

The area is on the northeastern outskirts of East Jerusalem, where the majority of residents are Palestinians, and is closer to the West Bank city of Ramallah.

The Palestinians and Arabs want East Jerusalem, which Israel captured in 1967, as the capital of a future Palestinian state.

The Israeli government, however, tried to downplay the report after its decision to build more than 300 housing units in East Jerusalem's Jebel Abu Ghneim, or Har Homa, drew an international protest following the re-launch of the Palestinian-Israeli negotiations at a conference in Annapolis, Maryland, last month.

Israeli government spokesman Mark Regev said no authorization has been given for the new settlement construction, while Housing Minister Zeev Boim said in a statement Wednesday, in apparent response to the Haaretz report, that it was "a preliminary examination of an initial plan."

Boim added, "Such feasibility checks are done all year round on all areas with building potential in Jerusalem … The ministry has to offer a solution to the housing problem in Jerusalem."

Whether the new settlement construction has been formally authorized, Israeli media reports indicated that blueprints were being drawn up, since Israel insists that building Jewish neighborhoods in East Jerusalem is legal because it annexed the area shortly after its 1967 occupation.

Senior Palestinian negotiator Saeb Erekat said it was "impossible to make peace and settlements at the same time," according to AFP news agency. "We consider these steps as threatening the beginning of the final negotiations between the two sides," he added.

At the Annapolis conference, Palestinian President Mahmoud Abbas and Israeli Prime Minister Ehud Olmert promised to immediately abide by the first phase of the international peace Quartet's road map, which called on Israel to stop settlement activity and for the Palestinians to improve security by reigning in militants. Olmert had also vowed to freeze construction of new settlements in the West Bank and dismantle illegal outposts.

The international community, including the United States, has already described settlement activities in the territories occupied in 1967, including East Jerusalem, as illegal.

U.S. Secretary of State Condoleezza Rice said the building of 300 new housing units in Har Homa would not contribute to the peace process and the Palestinians expect Washington to take a firmer position against the construction of up to 15,000 apartments in Atarot.

Palestinian officials told the Middle East Times they would urge the United States to exert real pressure on Israel to stop plans for the new settlement and all other expansion of settlements in East Jerusalem and the West Bank if Washington is serious about seeing a conclusion to the Palestinian-Israeli negotiations and a Palestinian state by the end of 2008.

President George W. Bush is set to make his first visit to Israel and the West Bank next month to help forge a peace deal before his term expires in January 2009. Palestinian officials warned that unless Washington – believed to be the only influential power on Israel – stops the plan to build the largest settlement in East Jerusalem, Bush's visit would be futile and the peace process would hit a permanent impasse.

Jewish settlements and East Jerusalem are among the thorniest final status issues discussed in the Palestinian-Israeli negotiations.

The Palestinians, backed by the Arabs, have repeatedly complained about Israel's settlement in East Jerusalem, saying it has been for decades trying to "Judaize" the city – holy to Muslims, Christians, and Jews – by changing its geographic and demographic face to consolidate Jerusalem as Israel's "eternal and unified capital."

Today, there are 280,000 Muslim and Christian Palestinian Arabs living in East Jerusalem, compared to 185,000 Jews.

Arab analysts say the construction of a colony with 15,000 housing units would draw many more thousands of Jewish settlers as part of Israel's traditional plan to turn the Jews into a majority and the Palestinians into a minority in Jerusalem, imposing another Israeli fait accompli that would make discussing the status of the city more difficult for Palestinians negotiators.