Israeli and Palestinian talks must continue with “no delay,” the US Vice-President said in a direct address to the Israeli public on the final day of a tumultuous visit.

"The most important thing is for these talks to go forward and go forward promptly and go forward in good faith," said Joe Biden in a speech to Tel Aviv University. "We can't delay because when progress is postponed, extremists exploit our differences."

Mr Biden’s visit was meant to affirm the US’s commitment to Israel’s security, and bolster the fledgling peace talks announced just days ago.

But Israel embarrassed the American delegation by announcing plans for 1,600 new homes in an east Jerusalem settlement during Mr Biden’s first day of meetings in Jerusalem – throwing into the limelight one of the most contentious issues facing the peace process.

Israeli Prime Minister Binyamin Netanyahu apologized for the timing of the announcement, but was unable to quell the angry response to what was dubbed a “slap in the face” to the Obama Administration.

In one of their most strongly-worded statements to-date, US officials condemned the Israeli settlement plan.

In his speech, Mr Biden said that he “appreciates” Mr Netanyahu’s response to the row, which included a promise made by the Prime Minister that a mechanism was being established to “prevent the recurrence of that sort of event.”

Mr Netanyahu also told Mr Biden that the actual construction in east Jerusalem was likely to take several years.

"That's significant because it gives negotiators the time to resolve this as well as other outstanding issues," Mr Biden said.

Palestinians, however, could decide to call off their involvement in the indirect talks, in which the US is due to act as a proxy mediating between the two sides.

Palestinian President Mahmoud Abbas told the Arab League Secretary General Amr Moussa last night that the Palestinians had decided not to enter the talks for now.

"The Palestinian side is not ready to negotiate under the present circumstances," Mr Abbas said.

Sabri Saidam, a senior official, said that there was a current case of “stagnation”.

“The coming few weeks and days are critical,” he said. He added, that Palestinians “are not ready to go to any negotiations unless Israel cancels this decision on the settlements.”

George Mitchell, the US peace envoy, has been trying to restart peace talks since they were called off more than a year ago.

Mr Abbas had demanded a full halt to Jewish settlement building in the West Bank and east Jerusalem, areas captured by Israel in a 1967 war, before any resumption of the two-decade old peace process.

Israel considers all of Jerusalem its capital, a claim that has not won international recognition.

Palestinians want east Jerusalem to be the capital of the state they hope to establish in the West Bank and Gaza Strip.