Israel's already strained relationship with the United States hit a new low last week when the Jewish state announced plans during a visit by Vice President Biden to build 1,600 homes for Israelis in East Jerusalem, which Palestinians claim as their capital. The announcement embarrassed Biden, who quickly condemned the plan, and cast a shadow over forthcoming U.S.-mediated peace talks.

In his first public comments on the matter, Israeli Prime Minister Benjamin Netanyahu told his cabinet yesterday that he was sorry about the diplomatic fiasco and had ordered an investigation into the incident. Netanyahu has said he had no prior knowledge. "There was a regrettable incident that was done in all innocence and was hurtful, and which certainly should not have occurred," he said.

He urged his cabinet "not to get carried away and to calm down" and gave no sign he would scrap the settlement plan. "We will act according to the vital interests of the state of Israel," he said.

The fate of East Jerusalem is the most explosive issue in the Israeli-Palestinian conflict. Israel captured the area in the 1967 Mideast war and considers the entire city its capital. The Palestinians claim the eastern sector - home to sensitive Jewish, Christian, and Muslim holy sites - as the capital of a future state that would include the West Bank and Gaza Strip.

Within hours of Israel's announcement last week, Biden condemned the plan and warned it could undermine U.S.-led indirect peace talks that are to start in coming weeks. A day after Biden left, Secretary of State Hillary Rodham Clinton called Netanyahu and lectured him for 43 minutes to vent Washington's frustration.

Even after Netanyahu's apology yesterday, the U.S. condemnation showed no sign of easing. Speaking on NBC television, President Obama's chief political adviser, David Axelrod, called Israel's action an "affront" and an "insult."

White House spokesman Robert Gibbs said the apology was merely a good start. "I think what would be an even better start is coming to the table with constructive ideas for constructive and trustful dialogue about moving the peace process forward," he told Fox TV.

Gibbs also confirmed that Clinton "outlined" steps the United States wants Israel to take. He declined to elaborate, but the steps could include a renewed U.S. demand for Israel to halt all settlement construction.

In light of the new construction plans, the Palestinians have threatened to call off U.S.-mediated talks before they even start. An Arab League advisory committee has already withdrawn its endorsement of the discussions. U.S. Mideast envoy George Mitchell is expected in the region this week to try to salvage the talks.