Israel’s decision in December to authorise 300 new homes in Har Homa infuriated Palestinians, who said it showed that Israel was not serious about commitments it made at the Annapolis conference.

Israel annexed East Jerusalem and expanded the city’s boundaries after the 1967 war and considers areas like Har Homa to be part of Israel. The US does not recognise the annexation.

“The important point here is that one reason that we need to have an agreement is that we can stop having this discussion about what belongs in Israel and what doesn’t,” Rice said in a roundtable interview with journalists from the region.

She added that there had been “important changes since the ‘49 armistice and since the events of ‘67... And those are going to have to be accommodated in an agreement”.

Bush is scheduled to meet Olmert for extended discussions later on Wednesday, and to meet the Palestinian leader, Mahmoud Abbas, on Thursday at his administration headquarters in Ramallah. American officials have played down expectations about any breakthrough during his visit here, the first leg of a trip that will also take him to Kuwait, Bahrain, the UAE, Saudi Arabia and Egypt.

Bush, though, spoke broadly of the promise of peace, while praising the American alliance with Israel as a guarantee of “Israel’s security as a Jewish state”.

Bush’s statement was loaded with its own significance, since the reference to Israel as a Jewish nation is seen by Palestinians as an acceptance of Israel’s refusal to allow Palestinian refugees who left in 1948 and their descendants to return to their homes in what is now Israeli territory.

... contd.