Israel's construction in eastern Jerusalem could imperil peace efforts with the Palestinians, Condoleezza Rice said.
The U.S. secretary of state, who on Saturday began her sixth trouble-shooting visit to Jerusalem and Ramallah this year, signaled that the Bush administration is monitoring Israeli housing projects on land where Palestinians want to build a state.
"I am very concerned that at a time when we need to build confidence between the parties, the continued building and the settlement activity has the potential to harm the negotiations going forward," Rice told reporters before meeting her Israeli counterpart, Tzipi Livni, on Sunday.
Israel has made clear that it reserves the right to build in eastern Jerusalem and West Bank settlement blocs, areas it plans to keep under any future peace deal with the Palestinians.
Rice also had strong words about Israel's circumspection in scaling back security measures in West Bank areas where the Palestinian Authority is trying to impose law and order.
"I understand the security considerations as well as anybody, but the obligation was undertaken to improve the lives of Palestinians and we are going to have to work very hard if we are going to make that true in a broader sense," she said.
Amid mutual recrimination and distrust, Israelis and Palestinians appear increasingly uncertain that a peace accord can be reached before President Bush steps down in January.
Rice said she prefers not to countenance such "pessimism."
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