Jerusalem (dpa) - Israel will continue building new homes in occupied East Jerusalem, Prime Minister Ehud Olmert told visiting US Secretary of State Condoleezza Rice, rebuffing her criticism of plans for settlement construction in the occupied Palestinian areas.

Reports Monday from a private meeting Olmert had with Rice said he had told her while Israel would not confiscate more Palestinian land, it would build in Jewish neighbourhoods of Jerusalem it expected to keep as part of any final settlement with the Palestinians.

The two met for dinner Sunday night, after Rice had used every public appearance she made during the day to slam Israeli plans to build around 1,300 new homes in a part of the West Bank Israel regards as being within the Jerusalem municipal boundaries.

She said such moves had the potential to "harm" the Israeli- Palestinian peace process, and did not create the confidence between the sides needed to forge a deal.

Israel insists on building to accommodate "natural growth" in West Bank settlement blocks it hopes to keep as part of any final agreement. This includes in East Jerusalem, which Israel captured in the 1967 war and annexed shortly afterwards, but which Palestinians want as the capital for their future state.

Olmert's comments notwithstanding, her remarks caused little stir in Israel, with one unnamed official quoted in the Jerusalem Post daily as saying that, with less than five months to the US elections, "it is not that important what she says any more."

The official said Rice's particularly stern comments about the settlement construction were an indication of frustration that after 21 visits to the region as secretary of state, she was facing the prospect of leaving office in January without an Israeli-Palestinian agreement on the table.

Olmert and Palestinian President Mahmoud Abbas pledged at the Annapolis conference last year to try and forge a deal by the end of 2008.

Although formal talks on a final treaty began around the turn of the year, officials on both sides have intimated that the deadline is unlikely to be met, and instead of talking about a peace deal, they are now musing about the possibility of perhaps reaching some sort of framework agreement. It is, however, still far from certain that even this aim can be met.

The final agreement talks, conducted by Israeli Foreign Minister Tzipi Livni and former Palestinian premier Ahmed Qureia, are being held amid a virtual media blackout. Both met with Rice on Sunday, but there were no reports of what transpired at the three-way parley.

Rice wrapped up her visit to Israel and the Palestinian areas Monday afternoon with a meeting with Israeli Defence Minister Ehud Barak and Acting Palestinian Prime Minister Salam Fayyad.

The discussion centred on promoting economic projects in the Palestinian territories, as well as the activities of the Palestinian security forces in the West Bank.

Rice had earlier met alone with Barak, for talks which the Defence Ministry spokesman said focused on "regional, political and security issues." He gave no further details.

Rice arrived in Israel on Saturday night, her sixth visit since Israel and the Palestinian Authority renewed peace talks.