The week began on June 1 with Israel unveiling plans to build hundreds of new homes for Israelis in east Jerusalem, which the Palestinians continue to demand as the capital of their future state. Israeli Housing Minister Zeev Boim’s spokesman, Eran Sidis, said that 763 housing units will go up in Pisgat Zeev and 121 housing units in Har Homa. Both are large Jewish settlements in east Jerusalem, which was illegally annexed by Israel in 1967. This is bound to compromise peace talks between the Palestinians and Israelis as the discussions include the issue of Jerusalem.

On June 2, the Palestinian Authority's Prime Minister, Salam Fayyad was reported as being pessimistic about a peace deal with Israel, saying the accelerated construction of Israeli settlements largely strips the negotiations for Palestinian statehood of meaning. The peace process is "being trampled upon" with Israel's accelerated settlement construction, including the latest plans disclosed on June 1. Both sides claim the area where the building is to take place.

"Believe me, I would want this [a peace agreement] to happen today before tomorrow, but I am really at a loss trying to find reasons to be encouraged or optimistic, especially because the pace [of construction] has picked up so much," he said.

The issue of settlements was raised once again on June 4 when Israeli President Shimon Peres rejected condemnation by anti-settler group Peace Now of a planned visit to a West Bank settlement, saying he was president of all Israel and its citizens. The group wrote to Peres saying his visit to the key settlement of Ariel in the Israeli-occupied West Bank later on that day helps the enemies of peace. The issue of Jewish settlements in the West Bank remains one of the thorniest issues in efforts to achieve a peace deal between Israel and the Palestinians.

Also on June 1, Israeli Prime Minister Ehud Olmert delayed a key cabinet decision on an Egyptian-mediated truce with Hamas in and around the Gaza Strip. "This is an issue that has to go through the security cabinet," Olmert was quoted as saying by a senior official. "This is a serious and weighty issue with far-reaching consequences." The PM went on to delay the planned Sunday departure to Cairo of senior defence ministry official Amos Gilad, who represents Israel in the indirect talks in which Egypt has been acting as a mediator because Israel refuses to negotiate directly with Hamas, which it considers a terrorist organisation.

Olmert, who faces a graft investigation that threatens his political future, left on June 2 for a three-day visit to the United States, in what could be his last trip there are Prime Minister of Israel. With a corruption scandal sending his approval ratings into free-fall and calls for his dismissal growing, Bush's vision of brokering an Israeli-Palestinian peace deal by the end of year seems increasingly unlikely.

Olmert arrived in the US on June 3 and was assured a proper reception from President Bush and other U.S. official. He planned to discuss Israeli-Palestinian peace efforts and the Iranian nuclear threat with Secretary of State Condoleezza Rice and Bush and to address the pro-Israel lobbying group AIPAC during the three-day visit.

On June 3, around 100 Palestinians gathered outside the UNRWA headquarters in Gaza City to protest the year-long blockade of the Hamas-ruled Gaza Strip. The protestors included a number of women and children holding signs saying “No more blood” and “Lift the siege from us” as they called on the border crossings into Gaza to be re-opened. The protest was organised by The Popular Committee to Oppose the Siege, an organisation close to Hamas which said at least 177 Palestinians have died in recent months because they could not leave Gaza for treatment.

Bassim Naim, who heads the Hamas-run health ministry in Gaza, called for the breaking of the blockade and the reopening of the Rafah crossing to Egypt. He stated that more than “1,350 patients have been prevented from leaving Palestinian lands to receive treatment abroad which has led to a large increase in the number of martyrs of the blockade.”

On June 4, Palestinian leaders reacted with anger and dismay to US Democratic presidential candidate Barack Obama saying Jerusalem should be Israel's undivided capital. Obama told the American Israel Public Affairs Committee, a pro-Israel lobby group, that if elected president in November, he would work for peace with a Palestinian state alongside Israel. "Jerusalem will remain the capital of Israel, and it must remain undivided," he told the lobby group.

Also on June 4, Palestinian President Mahmoud Abbas called for reconciliation talks between his Fatah party and Hamas, which seized the Gaza Strip from forces loyal to him last June. "I call for a comprehensive national dialogue based on the Yemeni initiative," Abbas said. He pledged to seek Arab and international support for his initiative, which he said was aimed at "re-establishing the unity of our people." In March, Hamas and Fatah reached a Yemeni-brokered deal to open their first direct talks since the Islamists' bloody seizure of the Gaza Strip. The leader of Hamas in the Gaza Strip welcomed what he called a "new spirit" of dialogue from the Palestinian president but it was unclear how far the rival factions were moving to end a year-old schism. Aides to Abbas, who on Wednesday had called for "a national and comprehensive dialogue" with Hamas, were quick to insist the president wanted only discussion on the implementation of a recent Yemeni diplomatic initiative which called for Hamas to give up its hold on Gaza as opposed to a debate on mutual concessions.

A four-year-old girl was killed and her mother wounded on June 5 in an Israeli air strike on the Gaza Strip. The two were outside their house near Khan Yunis in the southern Gaza Strip when a drone fired a missile after apparently targeting armed militants in the area, witnesses said. The Khan Yunis hospital identified the girl as Aya Al-Manjar and said her mother was critically wounded.

Also on June 5, Middle East Quartet envoy Tony Blair defended himself against claims he was too close to Israel and the United States as he gave evidence to a British parliamentary oversight committee.

The former Prime Minister said he had not yet visited Gaza. Blair was asked about his neutrality as he gave evidence to the lower House of Commons international development committee, which is looking at the humanitarian and development situation in the Palestinian territories. Explaining why he had not yet visited Gaza, Blair said he did not want to exacerbate the current "tense and sensitive" situation and that he would choose "a moment that helps rather than a moment that harms".

The end of the week, June 6, saw Israeli and Palestinian negotiators agreeing to start drafting elements of a proposed peace accord, according to the chief Palestinian negotiator, Ahmed Qureia, who made it clear the decision did not necessarily reflect agreement on major issues. However, this would be the first time since negotiations resumed more than six months ago that anything would be committed to paper. "We agreed with the Israelis to begin writing the positions," Qureia told reporters late on Friday. Israeli government officials would not comment and Qureia did not explain why the two sides had agreed at this point to begin drafting a text.

Despite this, on the same day, Israeli PM Ehud Olmert raised the specter of a full-scale military operation in the Hamas-run Gaza Strip despite Egyptian attempts to mediate a truce. "According to the information as it is now, the pendulum is much closer to tough military action”, Olmert told journalists on arrival in Israel following his three-day trip to the United States.

His comments came a day after a mortar attack into southern Israel claimed by the armed wing of Hamas. But Olmert also suggested that the door to a negotiated truce was not completely closed.