JERUSALEM - Israel's Housing Ministry has drawn up a preliminary proposal to build new homes on occupied land in Arab East Jerusalem but Prime Minister Ehud Olmert's office said on Wednesday the plan has not been authorised.

The issue of Israeli settlement building near Jerusalem has clouded renewed peace talks between Israel and the Palestinians launched at a U.S.-sponsored conference last month.

Israeli Construction and Housing Minister Zeev Boim played down the proposal to build new homes near what Israel refers to as Atarot and the Palestinians call Qalandia. The area is on the outskirts of Arab East Jerusalem whose future is to be decided in final-status talks between Israel and the Palestinians.

Disputes over settlements and Jerusalem, which Israel wants as its undivided capital and where Palestinians want East Jerusalem as capital of a Palestinian state, are central to the negotiations President George W. Bush hopes can be concluded before he steps down next year.

Boim told Army Radio the housing proposal was only in the conceptual stage. A senior Israeli official said the Housing Ministry has "all sorts of contingency plans" that go nowhere.

Olmert's office distanced itself from the proposal.

"Nothing has been decided and nothing has been authorised," said Mark Regev, Olmert's spokesman.

The Palestinians are already protesting Israeli plans to build new homes at a settlement in southeast Jerusalem known to Israelis as Har Homa and the Palestinians as Abu Ghneim.

The Palestinians have demanded a halt to all settlement activity.

Israeli Vice Premier Haim Ramon, a close Olmert confidant, criticized the draft Atarot-Qalandia proposal, suggesting it was conceived by low-level ministry officials.

"I think these steps are unnecessary at this stage ... The road to building a neighbourhood like this is very long, and these things are not helping negotiations," Ramon said on Israel Radio.