RAMALLAH, West Bank (AFP) – Prospects for indirect peace talks lay in tatters on Thursday after the Palestinians said they would not negotiate with Israel unless it reversed plans to build 1,600 settler homes in east Jerusalem.

The move came following a similar decision by the Arab League as international pressure mounted on Israel after the project was announced during a visit by US Vice President Joe Biden aimed at promoting the talks.

Palestinian president Mahmud Abbas said he could not go through with the indirect talks that the Palestinians had reluctantly agreed to on Sunday unless the new housing project was cancelled, his top negotiator told AFP.

“I am waiting for (US Middle East envoy George) Mitchell to come back next week to give us the answer that the decision has been cancelled,” Abbas told Arab League Secretary General Amr Mussa, according to Saeb Erakat.

The Arab League had issued a statement overnight following an emergency meeting of Arab ambassadors saying “the Israeli measures must be stopped before any discussion on a resumption of talks, direct or indirect.”

State Department spokesman Philip Crowley confirmed on Wednesday that the United States had raised the issue with Israeli officials.

“We are talking to the government and trying to understand what happened and why,” he told reporters in Washington.

The news had already sparked a strong condemnation from Biden, who met Abbas and other senior Palestinian leaders in the West Bank on Wednesday.

It also sparked a row within Israeli Prime Minister Benjamin Netanyahu’s rightist-led coalition, with a minister from the centre-left Labour party, a key partner, warning that it may quit.

“Members of the Labour party have more and more difficulty in taking part in a coalition government that they joined with the purpose of relaunching the peace process with the Palestinians,” Agriculture Minister Shalom Simhon said.

“The anger of Biden is justified. A grave error has been committed and there is a price to pay,” he told army radio.

Cabinet secretary Zvi Hauser admitted the decision was a “mistake” in an interview with public radio and said Netanyahu had held a long discussion with Interior Minister Eli Yishai, whose ministry had announced the plans.

Biden had hoped his visit to the Middle East would boost the chances of indirect talks. Instead he found himself dealing with the fall-out from Israel’s decision.

Biden made his feelings clear during a press conference on Wednesday with Abbas in the West Bank city of Ramallah.

“As we move forward, the United States will hold both sides accountable for any statements or actions that inflame tensions or prejudice the outcome of talks as this decision did,” he said.

The Palestinians see east Jerusalem as the capital of their promised state.

Israel, which seized east Jerusalem in the 1967 war and later annexed it in a move not recognised by the international community, considers the city its eternal and indivisible capital.

The European Union’s foreign policy chief Catherine Ashton issued a statement on Wednesday condemning the Israeli decision.

“The European Union reiterates that settlements are illegal under international law,” it said, echoing a point made by United Nations Secretary General Ban Ki-moon a day earlier.

Several individual member states issued their own messages attacking the Israeli position, including veto-wielding Security Council permanent members Russia, which called the move “unacceptable,” and Britain, which said it would “give strength to those who argue that Israel is not serious about peace.”

In Washington, State Department spokesman Crowley said Mitchell would raise the matter when he returned to the region next week.

Mitchell on Monday had helped broker a deal to begin indirect talks. The last round of direct negotiations collapsed when Israel launched a devastating offensive against the Hamas-controlled Gaza Strip in December 2008.

By Thursday however, that work seemed to be in ruins.

“The insult has reached a point that not a single Arab could accept,” Mussa told reporters before the emergency Arab League meeting.

“Israel does not care about anybody, neither the mediator, nor the Palestinians.”