On her first visit as secretary of state to the de facto Palestinian capital, Hillary Clinton publicly chided Israel on Wednesday for demolishing dozens of Arab homes in East Jerusalem, a move that's undermining anemic peace talks with the Palestinians.

"Clearly this kind of activity is unhelpful and not in keeping with the obligations entered into under the 'Road Map'," Clinton said in reference to the unrealized Bush administration Israeli-Palestinian peace plan. "It is an issue that we intend to raise with the government of Israel and the government at the municipal level in Jerusalem."

Given a chance to raise the issue in a meeting 24 hours earlier with Jerusalem Mayor Nir Barkat, however, Clinton didn't mention the it, Barkat's office said Wednesday.

Clinton's gentle prodding was in response to Israeli plans to demolish scores of Arab homes in East Jerusalem to clear the way for an expanding archeological park in the City of David right outside the Old City walls.

While Clinton has aroused cautious optimism among many in the Middle East, Palestinians are waiting to see how much change the new administration will really bring to this seemingly intractable problem.

Palestinians were hoping that Clinton would press Israelis to curtail Jewish settlement expansion in the West Bank. Israeli leaders, however, said she barely touched on the issue in their talks.

At meetings with Clinton, Palestinian Authority President Mahmoud Abbas and Prime Minister Salam Fayyad both made it clear that the success of future peace talks with Israel will depend on the next Israeli government completely freezing settlement expansion.

That seems unlikely without concerted American pressure.

Israel's next government is likely to be led by the Likud Party's Benjamin Netanyahu, who supports continued Jewish settlement construction in the West Bank and has long opposed establishment of an independent Palestinian state.

"A new Israeli government that does not endorse the two-state solution, does not accept previous agreements, and does not totally freeze settlement activities, cannot be a partner for peace," said Saeb Erekat, one of the Palestinian Authority's senior diplomatic envoys.

In venue after venue, Clinton was asked how the Obama administration could work with Netanyahu if he refused to officially embrace creation of a Palestinian state.

"The two-state solution is the inevitable, inescapable outcome of any effort," Clinton told CNN. "It is hard to imagine what other positive outcome could be arrived at."

As Israeli's prime minister-designate, Netanyahu is pulling together a coalition government that could end up elevating ultra-nationalist Avigdor Lieberman to foreign minister.

Lieberman's Israel Is Our Home Party has gained popularity by calling for a loyalty oath aimed at the country's 1.5 million Arab citizens. It would strip the citizenship from anyone who refused to sign an oath to support Israel.

Lieberman has also alienated Arab leaders by suggesting that Egyptian President Hosni Mubarak could "go to hell" because he'd never come to visit Israel and calling for the banishment of Arab-Israeli parties that showed support for Israel's Middle East adversaries.

Clinton took no stand on internal Israeli politics. Some Israelis worry that the appointment of Lieberman, however, could send the wrong message to the international community.

Clinton also showed no indication that the U.S. was prepared to break with Israel and soften its stand on allowing Hamas hardliners to play a central role in a new Palestinian government unless they explicitly renounced their longstanding pledge to destroy Israel.

"In the absence of Hamas agreeing to the principles that have been adopted by such a broad range of international actors, I don't see that we or they — or anyone — could deal with Hamas," Clinton said in an interview on CNN.

Instead, Clinton reaffirmed America's support for Abbas, the pragmatic Palestinian leader who lost control of the Gaza Strip when Hamas militants seized complete power there in June 2007.

Abbas and Hamas are embarking on renewed talks aimed at bringing the Palestinian rivals together in a new unity government that would again run the West Bank and Gaza Strip.

The two sides are looking to create a technocrat government to run the Palestinian Authority until new elections can be held.

Palestinians also urged Clinton to press Israel to ease its restrictions on humanitarian aid and reconstruction supplies that are needed to rebuild the Gaza Strip.

On Wednesday, Clinton said that she "expressed concern" in her talks with Israeli leaders about the flow of humanitarian aid.

A day earlier, however, she publicly defended Israel for not opening the borders as long as Gaza militants continue to fire rockets.

Clinton's cautious approach on her first visit already has some Palestinians grumbling. Some are calling her "Condi Clinton," a comparison to Clinton's predecessor, former Secretary of State Condoleezza Rice.

"Palestinians deserve a Palestinian state and all they get from U.S. officials is talk and more talk," said Fatmeh Masri, a 38-year-old mother of six from a refugee camp outside Ramallah. "Clinton is not any different from Condoleezza Rice."