Israel freed 26 Palestinian prisoners early Wednesday but pledged to build thousands of new settler homes, just hours before a new round of peace talks that followed a three-year hiatus.
As Palestinians celebrated the release of a first batch of 104 prisoners most of whom had been serving life for killing Israelis, Housing Minister Uri Ariel vowed to build thousands more settler homes in the occupied West Bank.
"We will build thousands of homes in the coming year in Judaea and Samaria," he told public radio, using the biblical term for the West Bank.
"No one dictates where we can build."
His provocative remarks were made as the negotiating teams readied for their first direct talks in the region in nearly three years, following marathon efforts by US Secretary of State John Kerry who managed to draw the two sides back to the table in Washington on July 30.
But the talks looked set to be overshadowed by a deepening rift over settlements, sparked by Israel's announcement in the past three days that it would move ahead with 2,129 new settler homes, more than three quarters of them in annexed east Jerusalem.
An initial announcement on Sunday of 1,187 new homes for Jewish settlers was followed a day later by the approval of another 942 settlement homes in east Jerusalem, infuriating the Palestinians who want the land for a future state.
"This settlement expansion is unprecedented," senior Palestine Liberation Organisation official Yasser Abed Rabbo told AFP on Tuesday, warning that it could bring about the "collapse" of the talks.
"It threatens to make talks fail even before they've started."
The last round of direct peace talks broke down just weeks after they were launched in September 2010 in a bitter row over settlements.
In a bid to defuse the growing crisis, Kerry phoned Palestinian president Mahmud Abbas late on Tuesday, a senior Palestinian source told AFP.
"The call Abbas received tonight from Kerry is part of ongoing US efforts to defuse a crisis before the talks (begin), as a result of the new settlement tenders today and in the last few days," he said, speaking on condition of anonymity.
"We are waiting for the United States to take a clear stance on the escalating settlement building, which we consider the biggest obstacle that Israel is creating to stop serious talks from happening."
Abbas's office also confirmed he had received a phone call from Kerry "to discuss developments in the peace process, on the eve of the resumption of negotiations".
Despite the row, there were celebrations in the Palestinian territories overnight as Israel made good on a pledge to release 26 prisoners, a key component of the deal which brought the Palestinians back to the negotiating table.
Eleven of them received a hero's welcome at the Muqataa presidential compound in the West Bank city of Ramallah where they were met by thousands of cheering, dancing supporters at a ceremony addressed by Abbas.
"This is the first group," Abbas told the crowd at the celebration which began well after midnight. "We shall continue until we free all the prisoners from Israeli jails," he promised.
At the same time, the remaining 15 prisoners crossed into Gaza where they were mobbed by a joyful crowd of about 2,000 family members and supporters at the border as fireworks lit up the sky.
"I didn't see my son Atya for eight years, I thought I was going to die before I saw him again," said 65-year-old Atta Abu Mussa after meeting her son off the bus. "I am so happy!"
Samah Jendiya burst into tears when she finally set eyes on her brother Nehad who had served almost all of a 25 year sentence. "I never felt so happy," she said, her voice full of emotion.
"I'm finally free," smiled her brother. "I thank president Abu Mazen (Abbas)."
The 26 were the first batch of some 104 long-term detainees who are to be freed in stages contingent on progress in the negotiations.
Their release was billed as a confidence-building gesture ahead of the Jerusalem talks which will be held in the presence of US mediator Martin Indyk. So far no time or venue has been formally announced for the meeting.