Palestinians, Israeli police clash in Jerusalem

Citing biblical and historical links, Israel sees all of Jerusalem as its capital, a claim not recognised internationally. The Palestinians want East Jerusalem to be the capital of a future state in the West Bank and Gaza Strip.

Israel's announcement, during a visit last week by U.S. Vice President Joe Biden, of the Jewish housing plan in what Israel describes as a Jerusalem neighbourhood embarrassed the White House.

Palestinian President Mahmoud Abbas, who had just agreed to start indirect talks with Israel, demanded the project be scrapped first.

U.S. Secretary of State Hillary Clinton, in unusually blunt remarks, called Israel's actions an insult. Netanyahu voiced regret at the timing of the move but made no move to cancel the plan. Israel said construction was several years away.

Clinton telephoned Netanyahu on Friday to convey unspecified demands about the housing project as well as about demonstrating commitment to the U.S.-mediated peace talks, the State Department said, without elaborating.

U.S. officials said they were still waiting for Israel's formal response. Israeli media reports said Clinton had asked for the settlement plan to be scrapped and for Israel to agree to discuss core statehood issues with the Palestinians.

Palestinians say Jewish settlements will deny them a viable state. Washington has urged both sides not to make moves that could prejudge the outcome of peace talks.

(Additional reporting by Tom Perry in Ramallah and Nidal al-Mughrabi in Gaza; Editing by Alison Williams)