JERUSALEM — Israel unveiled plans yesterday to build 1,120 apartments for Jews in East Jerusalem, a move the Palestinian Arabs called a new setback for American-backed peace negotiations. The announcement by Housing Minister Zeev Boim appeared to be aimed at placating the Shas religious party, which had vowed to quit the coalition government if it conceded anything to the Palestinian Arabs on Jerusalem.

Shas had criticized a government freeze on approval of new Jewish housing projects in territory claimed by the Palestinian Arabs. Jerusalem’s city manager said Monday that the freeze was blocking needed construction in East Jerusalem, but Mr. Boim insisted that it applied only in the West Bank beyond the city limits.

“We are building all over Jerusalem within its municipal borders,” he told Israel Radio. “What people call delays are in fact final stages of coordination with City Hall.” Mr. Boim said construction tenders are being prepared for Jewish homes in two eastern neighborhoods, 750 in Pisgat Zeev and 370 in Har Homa.

Israel captured the eastern part of the city, along with the rest of the West Bank, in the 1967 Middle East War. It later annexed East Jerusalem and built new neighborhoods that are now home to 180,000 Israelis. There are 208,000 Palestinian Arabs in East Jerusalem.

Palestinian Authority leaders insist that adding homes to Jewish neighborhoods would prejudice any talks on dividing the city under a peace accord. The Palestinian Arabs want East Jerusalem as the capital of a future state.

Prime Minister Olmert imposed the housing freeze in December after the Palestinian Arabs criticized Israel’s plans to build new apartments in a separate project in Har Homa and another in the West Bank settlement of Maale Adumim. The dispute stalled the peace talks for weeks.

Palestinian negotiator Saeb Erekat said yesterday’s announcement undermined hopes for a peace agreement.

“Once again we ask the Israeli government to give peace a chance by stopping all settlement activity,” he said.

The Bush administration joined the Palestinians in criticizing the earlier housing plans. Yesterday, the White House press secretary, Dana Perino, said she was not familiar with the new plans, “but, obviously, there’s no doubt that an announcement of that sort would make the Palestinians concerned.”

The peace effort has been troubled since President Bush, Mr. Olmert, and President Abbas of the Palestinian Authority launched it at a November 27 conference in Annapolis, Md. Intensified rocket attacks on Israel from the Hamas-run Gaza Strip, a Palestinian suicide bombing in southern Israel last week, and Israeli threats of a large-scale invasion of Gaza have soured the negotiating climate.

Visiting here last month, Mr. Bush said his goal was a peace treaty by the end of his term next January. But Vice Prime Minister Haim Ramon of Israel said Monday the best Israel could hope for by then is a “declaration of principles” for peace that might take two to three years to flesh out.

Mr. Ramon, who met with Bush during his visit, said the president’s expectations were in line with Israel’s.

Despite the setbacks, Foreign Minister Tzipi Livni of Israel and a former Palestinian Authority foreign minister, Ahmed Qureia, the two sides’ lead negotiators, held two sessions this week, Ms. Livni’s spokesman said.

Little about their discussions has been disclosed, but Prime Minister Salam Fayyad of the Palestinian Authority said this week that the talks were not moving quickly enough.

The status of Jerusalem is the most sensitive issue of the talks, which also must settle the borders of a Palestinian state and the fate of Palestinian Arab refugees. Wary of losing the Shas Party and his majority in Parliament, Mr. Olmert said yesterday that discussion of Jerusalem would be put off until later in the year.

Meanwhile, the Israeli army said yesterday its troops raided 14 money-changing offices in the West Bank, confiscated nearly $850,000 and arrested five Palestinian Arabs on suspicion that funds were transferred from abroad for militants.