Q+A: Settlement project weighs on Middle East peace efforts

JERUSALEM (Reuters) - Israel's announcement of plans for 1,600 settler homes in an Israeli-annexed part of the occupied West Bank coincided with a visit by U.S. Vice President Joe Biden and Palestinian agreement to start indirect talks.

The announcement, made at a particularly sensitive moment in Washington's efforts to revive negotiations suspended since December 2008, has raised questions about Israel's intentions and prospects for peace.

WHAT'S ISRAEL REALLY UP TO?

Ask Israeli leaders and they say it's only business as usual -- a low-level planning committee giving the thumbs-up to another housing project for Jews in what Israel considers to be part of Jerusalem, its declared -- and unrecognized -- capital.

Palestinians say it was a deliberate attempt by Prime Minister Benjamin Netanyahu to sabotage peace talks in which he will likely come under pressure to trade land for a deal.

Netanyahu assured an embarrassed Biden, who condemned the project slated for the religious settlement of Ramat Shlomo, that the announcement shouldn't have been made now and in any case, nothing would be built there for years.

In a statement, Netanyahu said he "expressed his displeasure" to Israel's interior minister, a member of the ultraorthodox Shas party in his governing coalition, "at the timing of the announcement" by his ministry.

Israeli officials made clear the project and the construction of other homes for Jews in East Jerusalem, an area not covered by a limited settlement freeze Netanyahu announced in November, would go ahead.

ARE THE AMERICANS BUYING ISRAEL'S EXPLANTION?

U.S. officials seemed to take Netanyahu at his word he did not know the project would be announced during Biden's visit.

Biden was told about the announcement by senior aides after it was reported in the Israeli media, and they immediately started drafting a response. President Barack Obama was personally involved in approving the statement's blunt language, which took many Israeli officials by surprise.

Biden underlined his displeasure by arriving 90 minutes late to a private dinner with Netanyahu and his wife. He repeated the criticism publicly with Palestinian President Mahmoud Abbas at his side the next day.

WHAT DOES IT MEAN FOR U.S.-ISRAELI RELATIONS?

The relationship between the Netanyahu and Obama administrations was already under heavy strain. The incident threatened to further undercut trust, though Biden sought to play down any rift by describing the prime minister as a close personal friend during a speech in Tel Aviv.

For some U.S. officials, the announcement was a clear warning sign Netanyahu is having trouble controlling his coalition, a problem that could limit his room to maneuver under U.S. pressure in future. They know that doesn't bode well for trying to broker a final peace deal.

Though unwelcome, the announcement also presented an opportunity. It gave the White House an opening to respond forcefully -- a task particularly well-fitted to Biden, who is known for being blunt -- and to put Netanyahu on the defensive.

AND THE PALESTINIANS? WILL THEY GO AHEAD WITH THE TALKS?

The Palestinian leadership in the West Bank may seek to stall the process for a few weeks, concerned it will suffer more criticism, particularly from the Hamas Islamists who govern Gaza, if seen to be giving ground on its demand Israel cancel the settlement project.

The Arab League, which last week approved four months of indirect talks, declared on Wednesday the Palestinians believed circumstances were currently not right for the start of talks.

But U.S. officials expect the negotiations to begin, possibly as early as next week when U.S. Middle East envoy George Mitchell returns to the region. Many analysts believe it will be difficult for Abbas to resist U.S. pressure for long.

(Writing by Jeffrey Heller, Adam Entous and Tom Perry, Editing by Janet McBride)