Netanyahu said any further settlement construction may stir "unnecessary clashes with the international community – at a time when we are making an effort to convince the international community to reach a better agreement with Iran."
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In a statement issued late Tuesday evening, Netanyahu said the plan would make "no contribution" to settlements and would only hurt the cause.
The statement said his Housing Minister Uri Ariel had accepted the request.
The plan announced by Israel's Housing Ministry earlier in the day, prompted a Palestinian threat to walk out of Mideast peace talks. US officials said they were blindsided by the Israeli announcement and demanded an explanation.
In Washington, State Department spokeswoman Jen Psaki said the White House had been caught off guard by the earlier announcement to study settlement expansion.
"We were surprised by these announcements, and are currently seeking further explanation from the government of Israel," she said.
"Our position on settlements is quite clear – we do not accept the legitimacy of continued settlement activity. We've called on both sides to take steps to create a positive atmosphere for the negotiations," she added.
Under heavy US pressure, the Palestinians dropped a longstanding demand for a halt in settlement construction and agreed to renew peace talks with Israel in late July after a nearly five-year break.
To lure the Palestinians back to the table, Israel agreed to release 104 of the longest-serving Palestinian prisoners, all convicted in violent attacks on Israelis. The Palestinians also say they received assurances that settlement construction would be constrained.
Both sides have said the negotiations have made no progress. The situation deteriorated further late last month when Israel announced plans to build thousands of new homes in the West Bank and east Jerusalem.
In an interview broadcast on Israeli and Palestinan TV last week, US Secretary of State John Kerry said continued settlement construction raised questions about Israel's seriousness about pursuing peace. Saeb Erekat, the chief Palestinian negotiator said there have been no negotiations for the past week.
AP contributed to this report
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