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updated 11/10/2010 1:22:50 PM ET 2010-11-10T18:22:50

Secretary of State Hillary Rodham Clinton is criticizing Israel's new construction plans for disputed east Jerusalem as an obstacle to reviving Israeli-Palestinian peace talks.

In remarks at the State Department, Clinton said the U.S. was "deeply disappointed" by the Israeli move. She called it "counterproductive" and said it undermined trust between Israelis and Palestinians.

One day before she is due to meet visiting Israeli Prime Minister Benjamin Netanyahu in New York, Clinton announced the United States had given an additional $150 million to the Palestinian Authority as it prepares to assume full statehood under a potential future peace deal.

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Clinton faces the tough task of reviving Middle East peace talks that began in Washington on September 2 but were suspended by the Palestinians three weeks later when Netanyahu refused to extend a 10-month limited building freeze in West Bank settlements.

Israel announced on Monday it was moving ahead with a housing project in a part of the occupied West Bank that Israel annexed to Jerusalem 43 years ago.

"This announcement was counterproductive to our efforts to resume negotiations between the parties," Clinton told reporters in Washington.

"We will continue to work to resume negotiations to address this and other final status issues," Clinton said. "We still believe that a positive outcome is both possible and necessary."

Netanyahu, speaking to reporters in New York on Wednesday, said he planned to use the meeting with Clinton to discuss "ways to achieve a peace agreement."

"We have broad understandings with the United States on this issue and many others that surmount the disagreements over other matters," he said.

Diplomats have said Netanyahu is seeking to finalize a package of incentives, including ideas on security, that could help him sell another partial construction moratorium to his governing coalition, which is dominated by pro-settler parties.

With little apparent movement on negotiations, Palestinians have called for the international community to step into the breach by recognizing the Palestinian state -- a move the United States fears could further complicate the issue.

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But Washington has nevertheless led the drive to bolster the Palestinian Authority (PA), which has been scrambling to fill a projected budget hole as it expands services in expectation of full eventual statehood.

The United States provided about $588 million to the PA in fiscal year 2010, and Wednesday's $150 million pledge marked an early delivery of the first tranche of what U.S. officials say will be about the same level of aid for fiscal 2011.

Clinton, joined by Palestinian Prime Minister Salam Fayyad by video conference, said the growth of the Palestinian government "removes excuses for delay and underscores that the Palestinian Authority has become a credible partner for peace."

Slow arrival of funds, especially from Arab states, has forced Fayyad to take austerity measures, and he said in September he needed about $500 million this year to fund everything from official salaries to infrastructure projects.

Clinton urged the Palestinians' allies to pony up.

"Unfortunately the Palestinian people still have some friends who prefer to support their aspirations with words rather than deeds, but that won't put food on the table," Clinton said.

Fayyad said his aim was to make the PA "state-ready" as soon as possible, with a goal to becoming financially independent by the end of 2013.

"Readiness for statehood is in fact the key objective," Fayyad said. "We are well on track. we are determined to stay the course despite the difficulties and obstacles that we continue to have to contend with every day."

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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