JERUSALEM - Israeli and Palestinian negotiators met on Wednesday for the first formal peace talks in seven years as part of a U.S.-led drive for a Palestinian statehood deal before President George W. Bush leaves office.

Announced at a conference last month in Annapolis, Maryland, the talks are going ahead despite calls by some Palestinians for a boycott over Israeli plans to build new houses on occupied land in the Jerusalem area.

Israeli construction at the same settlement near Bethlehem -- known to Israelis as Har Homa and Palestinians as Abu Ghneim -- derailed previous peace talks in 1997.

Israeli Foreign Minister Tzipi Livni and former Palestinian Prime Minister Ahmed Qurie are leading the negotiations in Jerusalem.

At Annapolis, Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas agreed to try to reach a deal on Palestinian statehood by the end of 2008.

On Tuesday Israel mounted one of its biggest raids into the Hamas-run Gaza Strip since the Islamist group seized control in June, killing five militants as dozens of tanks and armoured cars pushed into the territory.

Hamas, which routed Abbas's Fatah faction in Gaza, has rejected the peace push with Israel and its grip on the territory could complicate talks.

Israel regularly launches raids into the Gaza Strip to try to stop militants firing rockets and mortars into southern Israel. Olmert said late on Tuesday the Jewish state would "not stop" until it removed the rocket threat.

The militant group Islamic Jihad said it fired 14 rockets into Israel on Wednesday and vowed to keep up attacks. An army spokeswoman said at least 16 rockets and mortars were fired. There were no reports of casualties in southern Israel.

At least one Palestinian was killed in an explosion in Gaza on Wednesday, but the cause was not clear. The Israeli army said it was not aware of any Israeli attack.

PALESTINIANS CONSIDERED BOYCOTT

The military presented Olmert's security cabinet with plans to keep up pressure on Hamas with small incursions into Gaza and continued cuts in energy supplies, but said a broader invasion was not imminent, an official who attended the meeting said.

Israeli Foreign Ministry spokesman Arye Mekel said Wednesday's meeting would focus on procedural issues such as setting up negotiating sub-groups and the pace of talks.

Some Palestinian officials had considered boycotting the meeting after Israel issued a tender for about 300 new homes near Jerusalem on land it annexed during the 1967 Middle East war -- an annexation that is not recognised internationally.

Palestinian leaders decided to attend the talks and to focus on pressing Israel to freeze its settlement building.

"The essential point on our agenda today is the cessation of all settlement activities," senior Abbas aide Saeb Erekat said.

"We hope the Israeli government will revoke those tenders and not start building because that will really undermine efforts to advance the peace process," he added.

Israel says the building plan is legal but the tender provoked Palestinian outrage and rare censure from Washington.