Israeli Prime Minister Benjamin Netanyahu ended a troubled U.S. visit on Thursday with no apparent resolution of a serious dispute with Washington over Jewish housing in occupied East Jerusalem.

Despite his hints at potential compromise, Israeli commentators saw failure to secure a deal with U.S. President Barack Obama and said tensions with Washington appeared to have been left unresolved.

Israeli President Shimon Peres, the country's elder statesman, said Netanyahu "apparently ... did not reach an understanding wih the United States of America".

Newspaper headlines in Israel's two largest dailies, Yedioth Ahronoth and Maariv, said Netanyahu's "back was to the wall" and Israel was in a rare confrontation with America.

"A worsening of the crisis with the U.S.", said a headline in the Haaretz daily.

Palestinians want a complete settlement freeze in East Jerusalem and the rest of the West Bank. Citing biblical and historical links, Israel regards all of Jerusalem as its capital, a claim that has not won international recognition.

CABINET TO MEET

"The president asked the prime minister to take steps to build confidence for proximity talks so that progress can be made toward comprehensive peace," Obama's spokesman Robert Gibbs said, referring to indirect negotiations with the Palestinians.

Gibbs confirmed there were "areas of disagreement".

Netanyahu was expected to convene senior members of his pro-settler cabinet later on Thursday to consider a package of goodwill gestures drawn up by his and Obama's advisers in a flurry of meetings before his departure from Washington.

"We think we have found a golden way that would allow the Americans to move the peace process forward while preserving our national interests," Netanyahu said before leaving.

U.S. and Israeli officials have sought to get relations back on track after a plan to build 1,600 homes for Jews in Ramat Shlomo, a settlement on West Bank land that Israel annexed to Jerusalem after the 1967 war, was announced two weeks ago during a visit by U.S. Vice President Joe Biden.

Washington said the timing was insulting.

Gibbs said U.S. officials wanted clarification of word of further building in Jerusalem, after a city official on Wednesday said final approval had been given to develop a neighbourhood from which Palestinians were evicted last year.

Officials, including U.S. Middle East envoy George Mitchell, held talks in Netanyahu's Washington hotel as this news threatened to cause further strains between the allies.

The project calls for 20 units to be built at the site of the defunct Shepherd Hotel in the Sheikh Jarrah neighbourhood where a U.S. millionaire has been buying property for settlers.

The European Union issued a statement saying it "condemns the recent decision of the Israeli authorities to authorise construction around the Shepherd Hotel in East Jerusalem".

"The international community is making every effort to facilitate the resumption of peace talks. Settlement construction in East Jerusalem is illegal and undermines these efforts," it said.