Arab League chief Amr Moussa said on Wednesday that Palestinian President Mahmoud Abbas told him he would not enter indirect talks with Israel.

The decision came after Israel announced on Tuesday it would erect 1,600 new homes in East Jerusalem. Abbas had only agreed to the talks on condition that Israel imposed a settlement freeze.

"The Palestinian president decided he will not enter into those negotiations now ... the Palestinian side is not ready to negotiate under the present circumstances," Moussa told a news conference following an urgent meeting of Arab delegates at the Arab League headquarters in Cairo.

"The talks have already stopped," Moussa told Reuters later.

Earlier Wednesday the Arab League recommended withdrawing support for indirect talks between Palestinians and Israelis due to Israel's decision to approve new construction in East Jerusalem.

The league's Arab peace initiative committee on Wednesday called for a meeting of Arab foreign ministers to reconsider their support for the talks they extended on March 3.

Palestinian President Mahmoud Abbas agreed to a proposal to resume U.S.-mediated peace negotiations with the Israelis after 14 month hiatus due to the backing from Arab countries.

The committee said Israel's announcement Tuesday to build 1,600 new housing units showed it was not serious about negotiating, adding that if the Israeli moves are not halted immediately the talks would have no meaning.

Israel's Interior Ministry announced that approval had been granted to build new housing units in Ramat Shlomo, an ultra-Orthodox community of 20,000 in northeast Jerusalem, which borders the Palestinian village of Shuafat.

Palestinian Authority President Mahmoud Abbas expressed outrage over the plan in his meeting earlier Wednesday with visiting U.S. Vice President Joe Biden, who also condemned Israel's plan - a move the State Department said reflected the seriousness with which the Obama administration views the plan.

Abbas said Israel's continued settlement construction, especially in Jerusalem, threatens the negotiations before they get off the ground.

"We call on Israel to cancel these decisions," Abbas said. "I call on the Israeli government not to lose a chance to make peace. I call on them to halt settlement building and to stop imposing facts on the ground, and to give the efforts of the Obama administration and Senator Mitchell the chance to succeed."

Biden, who is in the region in an effort to restart Israeli-Palestinian peace talks, urged both sides to refrain from actions that inflame tensions or prejudice the outcome of talks.

"Yesterday the decision by the Israeli government to advance planning for new housing units in East Jerusalem undermines that very trust, the trust that we need right now in order to begin ... profitable negotiations," Biden said after meeting Palestinian leaders in Ramallah on Wednesday.

Biden on Wednesday said the Palestinians deserve a viable independent state with contiguous territory, in an effort to reassure them of U.S. support after Israel announced plans to expand a Jewish neighborhood in disputed East Jerusalem.

The Israeli move has overshadowed Biden's visit, meant to promote a new round of U.S.-led negotiations, and drawn Palestinian accusations that Israel is not serious about peace.

Israel apologized for embarrassing Biden with the timing of its announcement, but made clear it has no intention of reversing its plan.

Capping a day of meetings with Palestinian leaders, Biden told his hosts that the U.S. is committed to brokering a final peace deal - something that has eluded U.S. leaders for decades.

"The United States pledges to play an active as well as a sustainable role in these talks," Biden said. He stressed the Palestinians deserve an independent state that is viable and contiguous, meaning the territory should not be broken up by Israeli settlement enclaves.

It was a clear message to Israel that the U.S. expects a broad withdrawal from the West Bank as part of a deal.

Miliband: This is a bad decision at the wrong time

British Foreign Secretary David Miliband on Wednesday condemned Israel's decision to approve the construction of 1,600 new homes in East Jerusalem, saying it will strengthen those who argue Israel is not serious about peace.

"This is a bad decision at the wrong time," said Miliband. "Along with our EU partners, I condemn it as certain to undermine the mutual confidence we need."

"The recently launched proximity talks are an important opportunity to move towards a peace deal between Israelis and Palestinians," continued Miliband.

"Real peace will require the courage, commitment and compromise of both sides. This needs to be demonstrated not only by words, but by actions. The leadership of both sides must restrain those who try to provoke or disrupt the situation at this crucial moment of opportunity," he said.

EU Foreign Policy chief Catherine Ashton on Wednesday also criticized the Israeli decision and called on Israel to reverse it.

"The EU calls upon the Israeli authorities to fulfil all their commitments and obligations vis-à-vis the peace process and to refrain from unilateral decisions and actions that may jeopardize the final status negotiations," said Ashton. "

The European Union reiterates that settlements are illegal under international law. They undermine current efforts for restarting peace negotiations, constitute an obstacle to peace and threaten to make a two-state solution impossible."

Fayyad to Biden: Israel's actions undermine peace

Palestinian Prime Minister Salam Fayyad earlier Wednesday told Biden that Israel's new plan to build 1,600 homes in East Jeruaslem challenged Washington's efforts to get indirect peace talks underway.

"This is a moment of great challenge to the effort by the United States to get the political process going again," Fayyad said at a meeting with Biden.

Fayyad said Israel's action was "damaging for sure" and "definitely undermines confidence in the prospects for peace."

Netanyahu said he had been blindsided by the project's announcement by the Interior Ministry, run by Shas, an ultra-Orthodox, nationalist party that is a key member of his governing coalition.

The Palestinians, who had called for a settlement freeze as a condition for resuming talks suspended since December 2008, agreed this week to indirect negotiations with Israel under U.S. mediation, but no date, venue or agenda has been set.

Netanyahu ordered in November a 10-month halt to new housing starts in West Bank settlements but exempted those Israel considers part of Jerusalem and projects for Jewish homes in the eastern sector of the city captured in 1967.

"Messages have been sent to Biden and the Americans that there was no intention to undermine him," a senior Israeli official said. "We were genuinely surprised, just as surprised as the Americans."