RAMALLAH, West Bank - Israel said yesterday that it was building nearly 700 new apartments for Jews in East Jerusalem, where Palestinians hope to set up the capital of a future state. The United States, Palestinians, and the European Union condemned the plan, a fresh setback to American efforts to restart Mideast peace talks.

The Palestinians have said they will not resume talks without an Israeli settlement freeze, and criticized what they said was another show of bad faith by Israel.

"With each individual action it undertakes on the ground, Israel is saying no to meaningful negotiations," Palestinian negotiator Saeb Erekat said.

President Obama's Mideast envoy, George Mitchell, who is trying to find a formula for reviving negotiations, is due in Israel and the West Bank the second week of January.

White House press secretary Robert Gibbs said the United States "opposes new Israeli construction in East Jerusalem" and said neither side should take steps that preempt the outcome of talks. He urged both sides to restart negotiations without preconditions.

Sweden, which holds the rotating European Union presidency, said Israel's latest plans "prevent the creation of an atmosphere conducive to resuming negotiations on a two-state solution."

Israel insists the Jewish neighborhoods in East Jerusalem are not settlements, but rather part of its own capital, a view disputed by the international community.

The plan announced yesterday takes the government of Prime Minister Benjamin Netanyahu into new political territory, by initiating construction for Jews in East Jerusalem. Until now, the government has said it was endorsing plans already in the pipeline. Israel's Housing Ministry confirmed that the new construction bids are Netanyahu's first in East Jerusalem.

A partition of Jerusalem - with Jewish neighborhoods going to Israel and Arab neighborhoods to a future Palestine - would likely be part of any peace deal. Palestinians say that with each expansion of Jewish areas, the Arab portion of the city is shrinking, and partition becomes more difficult.

Netanyahu said he was willing to get back to talks immediately, telling a group of Israeli ambassadors, "Israel wants peace."

Israeli-Palestinian talks broke off a year ago. After coming to power nine months ago, Netanyahu withdrew key promises made to the Palestinians by his predecessor, including a willingness, in principle, to discuss the future of Jerusalem.

About 300,000 Israelis live in West Bank settlements and 180,000 more in East Jerusalem, areas claimed by the Palestinians for their state. Under U.S. pressure, Netanyahu agreed to slow new housing construction in the West Bank, though the building of more than 3,000 houses there continues.

The Israeli leader refuses to stop building in East Jerusalem, which Israel captured in the 1967 Mideast war and annexed. He says he will not cede any part of the city.

Successive Israeli governments have put up sprawling Jewish neighborhoods around East Jerusalem. Yesterday's decision would build in three of them: Pisgat Zeev, Har Homa, and Neve Yaakov.

Kadima Rejects Netanyahu's Offer

Israel's main opposition party has turned down an offer from Prime Minister Benjamin Netanyahu to join his coalition government.

The centrist Kadima party has 28 seats in Israel's 120-seat parliament, one more than Netanyahu's Likud. Former Foreign Minister Tzipi Livni, the Kadima leader, said yesterday that Netanyahu's offer was "cynical and unrealistic." She said it was "unworthy" of him to try to use Israel's difficult diplomatic situation for "small-time politics."

Netanyahu offered Kadima several cabinet posts without portfolios, while insisting he would make all the important decisions. Many analysts say his real goal is to split Kadima and reinforce his own party with defectors from the opposition party.

- Associated Press