Israel says must trade Jerusalem areas with Arabs

By Avida Landau and Brenda Gazzar

JERUSALEM (Reuters) - Israel's deputy prime minister responded on Sunday to U.S. criticism of plans to build homes on occupied land in the Jerusalem area by saying parts of the city must be given to the Palestinians to avoid losing U.S. support.

But Haim Ramon told Israeli radio that Israel would not give up the settlement where the building plan announced last week sparked Palestinian anger and a warning from U.S. Secretary of State Condoleezza Rice that it risked harming a peace process she helped relaunch last month at the Annapolis conference.

Israel has rejected criticism of a tender for some 300 more homes and other units at Har Homa -- which Arabs call Abu Ghneim -- on the grounds that it annexed the land and placed it inside Jerusalem city boundaries it drew after occupying the West Bank in 1967. That annexation is not recognized internationally.

Ramon said that Prime Minister Ehud Olmert's opponents were being unrealistic in hoping for U.S. support for any peace plan that would give the Jewish state all the present Jerusalem municipality, which includes Arab East Jerusalem and other territory annexed from the West Bank, as its capital.

Palestinian President Mahmoud Abbas wants East Jerusalem as capital of a Palestinian state in the West Bank and Gaza Strip.

Ramon told Army Radio: "I am convinced that all Jewish neighborhoods, including Har Homa, should be under Israeli sovereignty and the Arab neighborhoods should not be under Israeli sovereignty because they pose a threat to Jerusalem being the capital of Jewish Israel."

Palestinian leaders have said the new building project could wreck U.S.-backed peace talks and, in rare U.S. public censure of Israel, Rice warned on Friday that it could threaten the peace drive, saying the plan "doesn't help to build confidence".

Ramon said giving up Palestinian villages incorporated into Jerusalem after 1967, such as Walajeh and Jabal Mukaber, could avoid further rebuke from the United States at a time Israel needs its backing.