Israel said Friday that it had sent a message to US Ambassador Richard Jones in Tel Aviv, reassuring him that it will not build a new Jewish neighbourhood in a northern area of occupied East Jerusalem.

Israel, meanwhile, denied that it was holding indirect contacts with the radical Islamic Hamas movement over a truce in Gaza, as a senior minister lent his voice to growing calls that Israel should weigh such a truce.

Violence in Gaza nevertheless continued, with militants firing at least two more rockets at southern Israel Friday, and Hamas saying Israeli soldiers killed a militant of its armed wing in the south of the Strip. The Israeli military however denied involvement.

Israeli Housing Minister Ze'ev Boim had given the assurance that no new Jewish neighbourhood would be built in north Jerusalem to the US ambassador in person, Israeli government spokesman Mark Regev said.

But a project to build in Har Homa - an existing, controversial Jewish neighbourhood on Jerusalem's southern outskirts - would continue, he told Deutsche Presse-Agentur dpa.

The United States had asked for clarifications about the building projects, which come as Israel and the Palestinians are reviving negotiations after a seven-year freeze in the peace process.

Reports about the construction had caused outrage among Palestinians, and overshadowed the first formal Israeli-Palestinian talks last week after last month's peace conference in Annapolis, Maryland.

The Israeli Haaretz daily reported earlier this week that Boim, a relative hardliner within Prime Minister Ehud Olmert's Kadima party, wanted to build more than 10,000 new apartments in northern Jerusalem, near an industrial zone known as Atarot and near the Qalandiya checkpoint on the road to the West Bank city of Ramallah.

If built, it would have been the largest Jewish neighbourhood in East Jerusalem, Haaretz said. The Housing Ministry had said it was "examining the feasibility" of the project, but had not yet submitted a formal application for a permit to the Israel Lands Authority.

It had cited the urgent need for more housing in Jerusalem, which suffers a shortage, as the reason for weighing it.

Regev said the project in Har Homa was different and would go ahead because it was not a new settlement. The houses would be built in the existing neighbourhood, he said.

Construction in Har Homa, in the occupied West Bank within Jerusalem's municipality boundary, first began a decade ago under former Israeli premier Benjamin Netanyahu of the hard-line Likud.

Israeli Prime Minister Ehud Olmet, shortly before Annapolis, pledged not build any new settlements in the West Bank or authorize new land confiscations.

Regev said this meant Israel "we will not outwardly expand existing settlements, and we will not give any special incentives for people to live in settlements."

Israeli Vice Premier Haim Ramon meanwhile said he was trying to muster support for a bill offering compensation to settlers willing to leave the West Bank voluntarily even before a peace deal. "On paper," Ramon told Haaretz, some 70 lawmakers in the 120-seat Knesset (parliament) supported such a bill.

Referring to Hamas, Regev said meanwhile that "Israel will not talk to groups that refuse to accept the conditions of the international community, refuse to renounce terrorism and refuse to support reconciliation."

But a member of Olmert's security cabinet said Israel would be willing to negotiate a truce with Hamas if it made a "serious" offer.

Infrastructure Minister Benjamin Ben-Eliezer, of the leftist coalition Labour Party, said the offer would have to include a complete end to the daily rocket attacks from the strip.

It would also have to include an end to the weapons smuggling through tunnels under the border with Egypt and an immediate resumption of Egyptian-led indirect negotiations on the release of an Israeli soldier held captive in Gaza.

He said he spoke for himself, but added he was in on security issues and "the prime minister whom I know doesn't reject anything out of hand."

Since its take-over of Gaza in mid-June, Hamas has become increasingly isolated in a Strip under tight closure over the daily rocket-fire at southern Israel.

Hamas leader Ismail Haniya, who continues to call himself premier in Gaza despite his dismissal by Palestinian President Mahmoud Abbas of the rival Fatah, made an unusual call on Israeli television late Tuesday for a truce.

Amid the rocket attacks, a poll published in Israel's Yediot Ahronot daily Friday said 64 per cent of residents in the hardest-hit Israeli town of Sderot said they would leave if they could.

The Israeli military meanwhile withdrew from the central Gaza Strip overnight, after an incursion which left eight militants dead, one of whom died of wounds Friday morning.