"This is a preliminary examination of an initial construction plan. Such feasibility checks are done all year round on all areas with building potential in Jerusalem," Mr Boim said in a statement.

"The ministry has to offer a solution to the housing problem in Jerusalem."

Senior Palestinian negotiator Saeb Erekat said such plans would destroy the peace process and must be stopped.

"We consider these steps as threatening the beginning of the final negotiations between the two sides."

But Israel considers East Jerusalem outside the debate, as it annexed the area soon after the war, although the move has not been recognised internationally.

The Palestinians want it as the capital of their future state, whose formation is the goal of the nascent peace talks.

Separately, the Israeli transport minister suggested that Israel might be willing to talk to the Palestinian militant group which controls Gaza, Hamas, through a third party.

Shaul Mofaz said such mediation would be aimed at halting Palestinian rocket fire from the Gaza Strip.

Israel says the move is in response to an offer made on Israeli TV by Hamas leader Ismail Haniya, although Hamas has since denied that it intends opening negotiations with the Israelis.

Hamas refuses to recognise Israel, and the Israelis have sealed off the Gaza Strip since it seized control there in June.

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