Mon Feb 16, 7:38 am ET

JERUSALEM – Israel has taken control of a large chunk of land near a prominent West Bank settlement, paving the way for the possible construction of 2,500 settlement homes, officials said Monday, in a new challenge to Mideast peacemaking.

Successive Israeli governments have broken promises to the United States to halt settlement expansion, defined by Washington as an obstacle to peace. Ongoing expansion is likely to create friction not only with the Palestinians, but with President Barack Obama, whose Mideast envoy, George Mitchell, has long pushed for a settlement freeze. Obama has said he'd get involved quickly in Mideast peace efforts.

The composition of Israel's next government is not clear yet following inconclusive elections last week. However, right-wing parties are given a better chance to form a ruling coalition, with hardline leader Benjamin Netanyahu at the helm.

Netanyahu supports settlement expansion and has derided peace talks with the Palestinians as a waste of time, saying he would focus instead of trying to improve the Palestinian economy. Palestinian President Mahmoud Abbas has dismissed Netanyahu's approach as a non-starter, and his aides said recently that peace talks can only resume after a settlement freeze.

At the center of the latest expansion plans is Efrat, a settlement of about 1,600 families south of Jerusalem.

The mayor of Efrat, Oded Revivi, said the Israeli military designated 425 acres (172 hectares) near Efrat as so-called state land two weeks ago at the end of a lengthy appeals process. He said nine appeals were filed by Palestinian landowners, adding that eight were rejected and one was upheld.

Revivi said Efrat plans to build 2,500 homes on that land, but that several steps of government approval would still be needed before construction could begin — a process that could take years. Eventually, Efrat is to grow to a city of 30,000 people, he said.

The settlement is situated in one of the three major settlement blocs that Israel expects to hold on to in any final peace deal. Palestinian reaction to the latest development was not immediately available.

Palestinian President Mahmoud Abbas, Israel's peace partner, warned that continued settlement expansion would cripple peace talks.

"We oppose settlement activity in principle and if the settlement activity doesn't stop, any meetings (with the Israelis) will be worthless," Abbas said.

Nearly 290,000 Israelis live in West Bank settlements today, or 95,000 more than in May 2001 when Mitchell first called for a settlement freeze. At the time, he led a fact-finding mission to Israel and the Palestinian territories to find a way to end months of violence and resume peace talks.

Mitchell called on the Palestinians to halt attacks on Israelis and demanded that Israel halt construction in settlements.

In other developments Monday, Palestinian rockets exploded in southern Israel and Israeli jets bombed the Egypt-Gaza border as talks dragged on over a long-term truce that would bring quiet to the coastal territory.

Israel has been battling Gaza's Hamas rulers, while simultaneously pursuing a peace agreement with Abbas' rival government in the West Bank.

In Monday's violence, two rockets fired from Gaza landed in Israel, the Israeli military said, a near-daily occurrence even after the devastating three-week Israeli offensive that was meant to bring a halt to the fire. No one was injured, the military said.

Several hours later, Israeli jets bombed an area of smuggling tunnels in the frontier town of Rafah, according residents and Hamas security officials. Israel's military said the strike targeted a tunnel used to smuggle weapons in from Egypt and was retaliation for the rocket fire.

Israel ended its military offensive in Gaza on Jan. 18, and the territory's Islamic Hamas rulers declared a cease-fire the same day. But sporadic violence has continued as Egypt tries to mediate a long-term truce.

Hamas is demanding that Israel open Gaza's blockaded border crossings, but Israel says it will fully open the crossings only after Hamas releases Sgt. Gilad Schalit, an Israeli tank crewman captured in June 2006. Israel is allowing in only humanitarian aid, and on Monday was to allow some 200 aid trucks and fuel for Gaza's power plant to enter the territory, the military said.

Hamas wants Israel to release hundreds of prisoners in return for Schalit, including high-ranking militants and the masterminds of deadly suicide bombings.

Israel's top leadership is scheduled to meet this week to formulate a response to Hamas' demands.