But already, the talks have run into trouble following Israel's announcement last week that it plans to build more than 300 new homes in disputed east Jerusalem. The Palestinians have accused Israel of negotiating in bad faith over Jerusalem, one of the most contentious issues in the Israeli-Palestinian conflict.

The Palestinians want to make east Jerusalem the capital of a future independent state. Israel captured east Jerusalem in the 1967 Mideast war and annexed the area. It has signaled it would turn over Arab sections of the city to the Palestinians, but plans to retain all Jewish neighborhoods in the city.

The latest construction project is in Har Homa, a new Jewish neighborhood built in east Jerusalem. Secretary of State Condoleezza Rice said last week the new apartments would not ''help to build confidence'' for new peace talks. The Palestinians have asked the U.S. to intervene to halt the construction.

''This issue needs to be worked out before we start negotiations,'' Abbas confidant Yasser Abed Rabbo said. But he did not say construction must be halted as a condition for talks to begin.

The lead Israeli and Palestinian negotiators were meeting Monday to discuss this latest setback.

The status of Jerusalem is one of the ''core issues'' Olmert and Abbas hope to tackle next year, along with the final borders of a Palestinian state and the fate of millions of Palestinian refugees whose families lost properties during Israel's 1948 War of Independence.

While each of these issues is likely to spark heated discussions, the talks are further complicated by the Hamas militant group's control of the Gaza Strip.

Hamas took over Gaza in June after routing pro-Abbas forces there. Abbas responded by expelling Hamas from the government and installing a Western-backed administration in the West Bank.

Although Abbas claims to represent the people of Gaza, he wields little control there, raising questions about his ability to carry out a peace agreement in the future.