Israel is building 100 new homes in a settlement outside Jerusalem, political sources said on yesterday, after Washington signalled it could accept growth in Jewish enclaves on occupied West Bank territory.

Construction of the new neighbourhood at Har Gilo, already home to some 120 settler families, began earlier this month and is due to be completed by the end of the year, the sources said.

“If Israel does not stop this expansionist policy, we will not be able to find enough space to establish our state on,” Palestinian cabinet minister Saeb Erekat told Reuters. It was not clear if the new project would expand Har Gilo onto undeveloped land. The United States, the key Middle East mediator, hinted on Saturday it could accept construction within the existing boundaries of settlements, after previously insisting on a building freeze.

Palestinians said the US move undermined the peace process and their dream of independence in the West Bank and Gaza Strip. The Bush administration said it was amenable to some limited growth in West Bank settlements to help embattled Israeli Prime Minister Ariel Sharon push through his plan to withdraw from occupied Gaza amid opposition from his far right.

Washington had long called on Israel to suspend settlement building in accordance with a US led “road map” to peaceful Palestinian statehood in the West Bank and Gaza.

But the “road map” has been stymied by persistent violence. Israel blames Palestinian leaders’ failure to rein in militants waging an almost 4 year old revolt.

Witnesses and medics said Israeli troops patrolling the Gaza border overnight shot dead an unarmed Palestinian in Rafah, a refugee camp known as a militant stronghold. Military sources said soldiers had opened fire at a suspected gun nest.

Palestinians, who fear uprooting Gaza settlers is a cover for strengthening Israel’s hold on bigger West Bank enclaves, accuse the United States of tearing up its own peace plan.

“I do not believe that America says now that settlements can be expanded. This thwarts and destroys the peace process,” Palestinian Prime Minister Ahmed Qurie said on Sunday. His censure was echoed by Arab League Secretary-General Amr Moussa.

While the White House denied any official change in the US stance, an official said efforts were under way to clarify with the Israelis what “settlement activity” means.