By IAN DEITCH, Associated Press Writer

Monday, March 8, 2010 at 12:27 p.m.

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General view of the Jewish settlement of Beitar Illit, near Jerusalem, Monday, March, 8, 2010. Israel has authorized the construction of 112 new apartments in the West Bank despite a settlement slowdown, the government disclosed Monday _ a decision that enraged the Palestinians a day after they reluctantly agreed to resume peace talks. (AP Photo/Dan Balilty)

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In this photo released by the Israeli Government Press Office, Israel's Prime Minister Benjamin Netanyahu, right, shakes hand with U.S. Mideast envoy George Mitchell during their meeting in Jerusalem, Sunday, March 7, 2010. A skeptical Palestinian leadership agreed Sunday to begin U.S.-mediated peace talks with Israel, effectively ending a 14-month breakdown in communications between the two sides. (AP Photo/ GPO, Moshe Milner, HO)

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A Palestinian man works at a housing construction site in the Jewish settlement of Beitar Illit, near Jerusalem, Monday, March, 8, 2010. Israel has authorized the construction of 112 new apartments in the West Bank despite a settlement slowdown, the government disclosed Monday _ a decision that enraged the Palestinians a day after they reluctantly agreed to resume peace talks. (AP Photo/Dan Balilty)

- AP

General view of the Jewish settlement of Beitar Illit, near Jerusalem, Monday, March, 8, 2010. Israel has authorized the construction of 112 new apartments in the West Bank despite a settlement slowdown, the government disclosed Monday _ a decision that enraged the Palestinians a day after they reluctantly agreed to resume peace talks. (AP Photo/Dan Balilty)

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JERUSALEM — Israel and the Palestinians agreed to begin indirect, American-brokered talks, the U.S. Mideast envoy announced Monday - ending a 14-month deadlock in peacemaking and representing the Obama administration's first substantive diplomatic achievement here.

The announcement, however, came just hours after Israel enraged Palestinians by announcing new West Bank settlement construction on the same day U.S. Vice President Joseph Biden landed in the region to promote negotiations.

Israel's decision to build 112 new housing units on lands Palestinians claim for a future state highlighted the tough road ahead for those seeking peace in the region.

Also underlining the difficulties are sharp divisions between Palestinian moderates and militants as well as a hardline Israeli government opposed to many concessions seen as necessary for peace.

George Mitchell, the U.S. envoy who is visiting the region, said in a statement that he hoped the indirect talks "will lead to direct negotiations as soon as possible." And in what might have been a reaction to the latest Israeli move, he appealed to the two sides not do to anything that could jeopardize the talks.

"We also again encourage the parties, and all concerned, to refrain from any statements or actions which may inflame tensions or prejudice the outcome of these talks," said Mitchell, who is expected to shuttle between Israel and the Palestinian territories over the next several weeks.

Israel authorized the construction of new apartments in the West Bank despite a pledge to halt all new settlement building, the government disclosed Monday - angering the Palestinians just as Biden landed in Israel for the highest-level visit yet by an Obama administration official.

The announcement came a day after Palestinians agreed to hold indirect talks with Israel, backing off from a demand that Israel freeze all building in the West Bank and east Jerusalem before they returned to the negotiating table. They considered Israel's willingness to halt new construction insufficient because it excluded east Jerusalem and projects already under way.

Palestinian negotiator Saeb Erekat accused Israel of trying to undermine the talks even before they began. "If the Israeli government wants to sabotage Mitchell's efforts by taking such steps, let's talk to Mitchell about maybe not doing this (indirect talks) if the price is so high," Erekat said.

The Palestinians presented the U.S. envoy with a document outlining their desired peace agreement - a Palestinian state in Gaza and the West Bank, with minor border adjustments. At a meeting with Mitchell on Monday, Abbas also raised the issue of the new construction, Erekat said, saying it "put a big question mark on what it is that we came to do."

Israeli Prime Minister Benjamin Netanyahu sounded upbeat after his meeting with the U.S. envoy Monday. "I believe we will succeed in advancing the diplomatic process," the Israeli leader said. "But the diplomatic process is not a game, it is real, and rooted first and foremost in (Israel's) security."

Later Monday, the Israeli leader welcomed the new start to negotiations in a speech in Jerusalem, saying: "I hope the proximity talks will quickly lead to direct talks that would really allow the promotion of peace."

He stressed, however, that negotiations would only succeed if the Palestinians recognize Israel as a Jewish state and that Israel's security be guaranteed.

Jewish construction in the West Bank and east Jerusalem is a particularly sore point with the Palestinians.

When Israel announced its partial settlement freeze in November, it said at the time that exceptions to the slowdown could be allowed. And on Monday, the Ministry of Defense said an exception was made in the case of the ultra-Orthodox Beitar Illit because of what it called safety and infrastructure issues. The ministry said it was the biggest exception granted since the slowdown went into effect.

In Washington, U.S. State Department spokesman P.J. Crowley said Israeli officials had explained that the construction was approved before the moratorium.

"On the one hand, it does not violate the moratorium that the Israelis previously announced," Crowley said. "On the other hand, this is a the kind of thing that both sides need to be cautious of as we move ahead with these parallel talks."

Israeli anti-settlement watchdog Peace Now also questioned Israel's motives. "The Israeli government is welcoming the vice president by demonstrating, to our regret, that it has no genuine intention to advance the peace process," said the group's settlement expert, Hagit Ofran.

Militant Palestinian groups like Hamas have condemned Abbas' decision to renew talks, and on Monday several factions based in Damascus accused the Palestinian Authority of caving in to pressure from the U.S. and Israel.

Hamas is now in control of the Gaza Strip after winning a civil war there against Abbas' Palestinian Authority, which has close ties to the West and enjoys generous funding from the international community. The Authority has undertaken economic reforms in recent years in the one territory it still controls - the West Bank.

And on Monday Palestinian Prime Minister Salam Fayyad unveiled a $3.13 billion budget for 2010, about $80 million more than last year. He said that after years of a conflict-driven downturn, government revenues are up, partly due to economic growth projected at 7 percent this year.

Fayyad said he will more than triple spending on development projects to $667 million, in line with donor countries' desire to see more money earmarked for infrastructure, health and education.

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Associated Press writers Tia Goldenberg in Jerusalem and Karin Laub and Dalia Nammari in Ramallah, West Bank, contributed to this report.