Israeli Prime Minister Benjamin Netanyahu has given the green light for hundreds of new homes in a Palestinian-claimed area of Jerusalem, officials confirmed Wednesday, part of a gamble to mollify his restive coalition without sparking a major confrontation with the U.S.

Whether this balancing act can succeed could become clearer this week with the arrival of U.S. Mideast envoy George Mitchell. His response could signal whether the White House is ready to overlook its unhappiness with Israel as it prepares a new push for Mideast peace, perhaps as soon as this month, or whether it's digging in for a showdown over Jewish settlements.

The settlements are a core issue in the Israeli-Palestinian conflict. Nearly 500,000 Israelis now live in towns and neighborhoods built in the West Bank and east Jerusalem — lands captured by Israel in the 1967 Mideast war and claimed by the Palestinians. The Palestinians say the ever-growing settler presence will soon make it impossible for them to establish an independent state in these areas.

In a departure from his predecessor, President Barack Obama has come down hard on Israel's settlement activity, demanding a complete freeze on all construction, including in east Jerusalem. Israel has rejected the calls, saying some accommodation must be made for "natural growth" in the settler population.

With that in mind, Netanyahu granted approval to build hundreds of new homes in recent days. On Wednesday, officials confirmed the government has chosen developers to build nearly 500 new apartments in Pisgat Zeev, a sprawling neighborhood built for Jews in east Jerusalem. That followed Monday's announcement that 455 new apartments would be built in existing West Bank settlements. Israel also wants to complete work on more than 2,000 other homes currently being built.

Netanyahu has tried to portray the new projects as a prelude to a limited settlement freeze. "We would argue that doing what we're doing now will actually make progress possible tomorrow," said spokesman Mark Regev.

Netanyahu aides have tried to play down the significance of the new construction by noting that almost all of the homes are in large settlement blocs that Israel expects to retain under any future peace deal.

They also concede that Netanyahu approved the construction to placate hard-liners in his own coalition government, who are upset about the prospect of a settlement freeze. They spoke on condition of anonymity because they were discussing private talks among Netanyahu's inner circle.

For now, the moves are paying off at home. Netanyahu's hard-line coalition partners have largely lined up behind him. But the international community is deeply skeptical.

In the latest public U.S. rebuke, State Department spokesman Ian C. Kelly said Wednesday, "Our position is clear: We believe that Israel has an obligation to cease all settlement activity," whether in east Jerusalem or the West Bank. Last week, when news of the new settlement construction broke, the U.S. said it "does not accept the legitimacy of continued settlement expansion."

EU External Relations Commissioner Benita Ferrero-Waldner on Wednesday joined the sharp criticism.

"We have to be realistic and see that this settlement issue is at the moment an issue that blocks the negotiations," Ferrero-Waldner told reporters. The European Union and U.N Secretary-General Ban Ki-moon expressed "concern" over Israel's approval of settlement expansion.

Palestinian negotiator Saeb Erekat said American credibility in the region was at stake. The Palestinians say they will not restart negotiations, which broke down shortly before Netanyahu took office in March, until Israel halts all settlement construction.

"People are asking the Americans now: If you could not convince the Israelis to stop settlement activity, will anybody in the Arab and Islamic world believe you can make Israel return to the '67 borders or withdraw from settlements?" he said.

The Palestinians claim the West Bank and east Jerusalem, along with the Hamas-ruled Gaza Strip, for their hoped-for state. Israel captured all three areas in the 1967 Mideast war, then withdrew from Gaza in 2005. Hamas militants overran that territory two years later.

Behind the rhetoric, however, there are subtle signs of movement, and much will depend on what Mitchell brings with him when he comes this weekend. The Israelis hope he can persuade the Arab world to respond to a settlement freeze with goodwill gestures of their own, such as re-establishing limited trade or diplomatic ties.

The Americans are pressing Netanyahu and Palestinian President Mahmoud Abbas to meet for the first time during the U.N. General Assembly later this month. U.S. officials in Washington have hinted that while they're not pleased about the settlement building, they could overlook it if the sides are willing to start talking again.

Palestinian officials say Abbas will probably meet Netanyahu to please the Americans, though it's unclear what would follow. They say he is in touch with Arab leaders in hopes of forming a common position.