Rice hopes Israeli building will not "cloud" talks

WASHINGTON, Dec 10 (Reuters) - U.S. Secretary of State Condoleezza Rice said on Monday she hoped Israel's plans to build homes on occupied land would not "cloud" peace talks with the Palestinians and cautioned that time was running out to end the conflict.

Palestinians threatened to boycott peace negotiations set to start on Wednesday after Israel defied Washington and others by planning about 300 new homes on land Israel annexed from the West Bank after it occupied the territory in 1967.

"This is a time that we should be building confidence and this is not something that builds confidence," Rice said of the plan by Israel to build new homes.

"I don't want all of that to cloud what I consider to be the very extraordinary and strong commitment of both Prime Minister Olmert and President Abbas to try and end their conflict," she added at a women's foreign policy forum.

Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas committed themselves last month at a U.S.-sponsored conference in Annapolis, Maryland to relaunching peace talks dormant for seven years and getting a deal before the end of the Bush administration in January 2009.

The two leaders have promised to negotiate the toughest issues that divide them -- the status of Jerusalem, the contours of a future Palestinian state and the right of return of Palestinian refugees.

"Certainly anything that looks like an effort to prejudge final status negotiations is simply not going to work because the United States would not consider anything that was trying to prejudge final status negotiations," Rice added.

She said she had made the U.S. position clear on new settlement activity during a meeting in Brussels last Friday with Israeli Foreign Minister Tzipi Livni.

Under obligations contained in the 2003 "road map" for Middle East peace, Israel must freeze all settlement activity.

But Israel argues that the new homes, in a neighborhood known as Har Homa by the Israelis and Abu Ghneim by Arabs, falls outside commitments in the road map because it was annexed to Israel.

Rice said time was running out for negotiations on a Palestinian state, as a new generation emerged on both sides who did not see the need to end the conflict.

"The window is closing for a two-state solution. I worry that increasingly the people who believe in a two-state solution, particularly on the Palestinian side, are my age," she said.

"Time in that sense is not on our side in the Palestinian-Israeli conflict and it is one reason to push this particular track as far and as fast as it can go."

The Palestinian Territory is divided between Abbas's Fatah movement which controls the West Bank and the militant group Hamas which runs the Gaza Strip.

Asked whether she believed there could be a deal without Hamas, which the United States has labeled a terrorist group, Rice said it was up to Hamas to decide.

"If there is enough momentum and the Palestinian people can see what their state is going to be ... I would think that would have a unifying effect on the Palestinian population as a whole," she said. "I would hope that all of them would recognize that no state will be born of violence."