Arab states should prepare for the possibility that the Palestinian-Israeli peace process may be a total failure and prepare alternatives, Arab League Secretary-General Amr Moussa said on Saturday.

"We have to study the possibility that the peace process will be a complete failure," Moussa told a summit of Arab leaders in the Libyan town of Sirte.

"It's time to face Israel. We have to have alternative plans because the situation has reached a turning-point," he said.

Mousa did not specify the alternatives - but one option could be for the Palestinians to bypass the peace process and declare a state unilaterally.

He also said the Arab League should open a dialogue with Tehran to address concerns, especially among Iran's neighbors across the Gulf, about its nuclear program.

Palestinian President Mahmoud Abbas at the summit said indirect negotiations between Israel and the Palestinians cannot continue unless Israel stops building in the settlements.

"We cannot resume indirect negotiations as long as Israel maintains its settlement policy and the status quo," Abbas said at the opening session of the two-day summit.

Turkish Prime Minister Recep Tayyip Erdogan also spoke at the summit and condemned Israel's policy of considering the whole of Jerusalem as its united capital.

"This is madness and it does not commit us in any way," said Erdogan in a speech to Arab leaders.

"Jerusalem is the apple of the eye of each and every Muslim ... and we cannot at all accept any Israeli violation in Jerusalem or in Muslim sites," the Turkish premier added.

The status of Jerusalem and Friday's clashes in the Gaza Strip, the worst in a year, are likely to dominate talks when members of the 22-nation summit, which began Saturday.

The summit comes amid heightened, and lethal, tensions over Israeli plans to continue building in East Jerusalem and access to sites there revered by Jews and Muslims alike, and follows clashes in the Gaza Strip Friday that saw Israeli tanks and heavy machine-gunners exchange fire with Palestinian militants.

Hisham Yussef, Moussa's chief of staff, on Saturday told reporters in the coastal Libyan town of Sirte that the status of East Jerusalem would be a focus of the talks.

"In light of current conditions, it is difficult to talk about negotiations," Yussef said Saturday.

"It is unacceptable that while the Palestinians have been moving toward negotiations in good faith, the Israelis have taken decisions contrary to the understandings that were reached and to the possibility of achieving progress," he said.

Israel has stood firm behind its plans to continue building in east Jerusalem, despite U.S. and European pressure to freeze construction east of its 1967 borders so that indirect, or "proximity" talks with the Palestinians can begin.

"Jerusalem is not a settlement. It is our capital," Israeli Prime Minister Benjamin Netanyahu said ahead of his meeting with US President Barack Obama in Washington last week.

"We must provide adequate support to the steadfast Arab citizens in the holy city, because their survival is very important in the battle to maintain the city's Arab identity," Yussef said.

He cautiously welcomed reports that Libya would offer $400 million in support to Arab residents of East Jerusalem.

"If this is true," Yussef said, "It is wonderful news. But we must hear this directly from Libya, and so far there has been no official word."

The aid would support Palestinian Authority institutions in East Jerusalem.

In addition to leaders and representatives of the Arab League's members, UN Secretary General Ban Ki-Moon and Italian President Silvio Berlusconi are also expected to attend Saturday's summit.

Absent from the summit will be Egyptian President Hosni Mubarak due to his recent surgery. Lebanese President Michel Suleiman and several Gulf state leaders will also be absent due to tensions with Libya.