By ANNE GEARAN and STEVEN GUTKIN, Associated Press Writers

Tuesday, March 16, 2010 at 3:41 p.m.

/ AP

A Palestinian man works on a construction site for a new home in the east Jerusalem neighborhood of Ramat Shlomo, Tuesday, March 16, 2010. Secretary of State Hillary Rodham Clinton said Tuesday that Israel must prove it is committed to the Mideast peace process with actions but brushed aside suggestions that U.S.-Israeli relations are in crisis and reaffirmed America's steadfast commitment to the security of the Jewish state. Clinton said U.S. and Israeli officials are in intense talks about how to repair the damage caused by last week's Israeli announcement of new Jewish housing in east Jerusalem while Vice President Joe Biden was visiting the country. (AP Photo/Tara Todras-Whitehill)

- AP

Brazilian President Luiz Inacio Lula da Silva, right, listens to Israeli Prime Minister Benjamin Netanyahu speak in the Knesset, Israel's parliament, in Jerusalem, Monday, March 15, 2010. Lula da Silva is in Israel on the first official visit by a Brazilian leader. (AP Photo/Yin Bogu, Pool)

- AP

Secretary of State Hillary Rodham Clinton speaks during a meeting with Ireland's Foreign Minister Michael Martin, not shown, Tuesday, March 16, 2010, at State Department in Washington. (AP Photo/Luis M. Alvarez)

WASHINGTON — The United States and Israel stepped back Tuesday from their deepest rift in decades, a dispute over new Jewish homes in a traditionally Arab part of Jerusalem that quickly became a test of U.S. and Israeli commitment to peace talks and one another.

Secretary of State Hillary Rodham Clinton said U.S. and Israeli officials are in intense talks about resuming peace negotiations, moving past the breach opened when Israel announced last week, during a visit to Jerusalem by Vice President Joe Biden, that it will build 1,600 more Jewish houses in east Jerusalem.

Israeli officials privately say Prime Minster Benjamin Netanyahu - Washington-bound next week - is willing to go to some lengths to calm tensions. U.S. officials are also looking for a way to finesse their demand that Israel cancel the construction.

There is no obvious half-measure, and both countries are wary of looking weak to the other, to important political constituencies at home and to the Arab world. Still, the rhetoric from both capitals suddenly softened.

"We have a close, unshakable bond between the United States and Israel and between the American and Israeli people," Clinton said. "We share common values and a commitment to a democratic future for the world and we are both committed to a two-state solution. But that doesn't mean that we're going to agree."

Clinton has been the leading voice of U.S. outrage over the episode, which embarrassed Biden and called into question Israel's stated willingness to resume talks with the United States as an intermediary. She has called the announcement an insult and dressed down Netanyahu by telephone last week. The United States wants to see a gesture from Israel to the Palestinians and a statement that the biggest issues dividing those two parties, including the fate of Jerusalem, will be on the table for talks.

"Israel appreciates and values the warm words of Secretary of State Clinton about the deep ties between Israel and the U.S. and the commitment of the U.S. to Israel's security," government spokesman Mark Regev said in Jerusalem. "Concerning the commitment to peace - Israel's government has proved over the past year its commitment to peace, in words and in deeds."

For President Barack Obama, the unusually public fight tests his willingness to take Israel to task in the name of Mideast peace, even if it means angering some powerful political forces whose support is necessary to further his domestic agenda. For his part, Netanyahu is left to choose between his desire to populate east Jerusalem with Jews and his need not to alienate his all-important U.S. ally.

Netanyahu's looming visit leaves little time to paper over the rift. If Netanyahu gets a cold shoulder, he has little incentive to scrap settlements the United States sees as an affront to peace talks. If he skips the trip entirely, the Obama administration risks a backlash from the pro-Israel lobby and its congressional backers, many of whom think Washington has already taken the spat too far.

The dispute exposed tensions that have been simmering between the two allies since the election of a liberal-minded U.S. administration and a right-leaning Israeli government more than a year ago. The United States views the housing expansion as a deliberate complication to an eventual peace deal.

Palestinians want east Jerusalem to be the capital of an eventual independent state.

Netanyahu on Tuesday ordered his ministers and spokespeople not to talk publicly about the building plan.

However, Interior Minister Eli Yishai, whose office issued the order for the new homes, did agree to speak to The Associated Press about other issues, such as the need to calm tensions with the U.S.

"I am very sorry that there is an escalation now and we are taking many measures to calm this," he said. However, he added that "Israel is independent and can do what it thinks is right."

An AP reporter was poked in the back by a Yishai aide when he asked the minister about the construction plan . The minister then abruptly ended the interview, removing a microphone from his lapel.

The Obama administration's Mideast peace envoy canceled a trip to Israel and the West Bank this week due to what the State Department said were scheduling conflicts.

Clinton played down a connection to U.S. pique, but administration officials acknowledged a link, saying there was no point in sending former Sen. George Mitchell now because Israel had not budged on the U.S. demand to roll back the planned settlements.

Clinton restated U.S. "dismay and disappointment" with the announcement but disputed the perception of the relationship in crisis.

"I don't buy that," she said.

There are no current plans for Netanyahu to meet with Obama before his departure for his overseas trip, nor with Biden.

The Obama administration sees the next play as Israel's, which now must demonstrate its seriousness about talks with action, said a senior administration official, speaking on condition of anonymity to discuss sensitive diplomatic matters more freely. The official said the U.S. position on settlement expansion has not changed.

Recognizing the difficult domestic politics that accompany the latest fracas, the administration is aggressively reaching out to constituency groups and to Capitol Hill to explain its position, the official said.

Rising violence on the streets of Jerusalem accompanied the political maneuvering. Palestinians are growing increasingly frustrated with the lack of progress toward achieving a homeland of their own, and unsubstantiated rumors of Jewish encroachment on their holy sites gave way to the heaviest clashes in months.

The Obama administration's Mideast peace envoy canceled a trip to Israel and the West Bank this week due to what the State Department said were scheduling conflicts.

The Israeli-U.S. tiff was seen by Arab officials as an opportunity to push Washington to exert more pressure on Israel, and said it bears out their claim that Israel is sabotaging talks.

"Israel must know the international community is angry," Egypt's Foreign Minister Ahmed Aboul Gheit said Monday.

"There is a U.S.-Israel faceoff, and an American anger obvious in the American statements," he added. "Let's leave a chance for this argument to see how it will brew."

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AP writers Aron Heller in Jerusalem, Sarah El Deeb in Cairo, Jennifer Loven and Matthew Lee in Washington contributed to this report.