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Israeli Prime Minister Benjamin Netanyahu attends the weekly cabinet meeting in Sde Boker, Israel, Sunday, Nov. 10, 2013. Netanyahu said that Israel would do all it could to keep world powers from striking a "bad and dangerous" deal with Iran over its nuclear program.David Buimovitch/The Associated Press

It was a dark day in Israel Wednesday as talk turned to war with Iran and an end to the peace process with the Palestinians.

Prime Minister Benjamin Netanyahu told parliament in Jerusalem that continued economic pressure on Iran was the best way to persuade that country to abandon its alleged nuclear weapons program. The alternatives, he said, were making a bad deal with Tehran and war.

"I would go so far as to say that a bad deal could lead to the second, undesired option," he said, meaning war.

A deal currently under discussion between Iran and the five permanent members of the UN Security Council plus Germany – referred to as the P5+1 – has been condemned by the Israeli leader. It would alleviate about 30 per cent of the effect of economic sanctions against Iran, Israeli officials estimate, in exchange only for a temporary freeze on Iran's enrichment of uranium. That arrangement would put between $20-billion and $40-billion in Iran's coffers, said Israeli Intelligence Minister Yuval Steinitz.

But while Mr. Netanyahu was busy admonishing the P5+1 group for what he called its shoddy negotiations and rallying Israel's supporters on Capitol Hill in Washington, his Housing Minister, Uri Ariel, was busy on another front. On Tuesday, he announced a plan for more than 20,000 new homes in Israeli settlements in the Palestinian West Bank, including 1,200 homes in an area known as E1, a particularly controversial site outside Jerusalem that, if developed, will effectively sever the Palestinian territory in two.

Mr. Netanyahu was said to have been furious at the minister's initiative and, in a midnight statement Tuesday night, ordered Mr. Ariel to withdraw the tender and chastised him for creating "an unnecessary conflict with the international community at a time when Israel is sparing no effort to prevent it from striking a bad deal with Iran."

"The move," Mr. Netanyahu said, "does not offer the settlement enterprise any advantage. On the contrary, it harms it."

The damage, however, may already have been done.

Washington's response was severe and lingering: "The United States is deeply concerned by continuing Israeli actions with respect to settlement construction," White House National Security spokesman Tommy Vietor said.

"Not only are continued Israeli settlements illegitimate," Mr. Vietor said, "Israel's actions run counter to efforts to resume direct negotiations."

As well, the two principal Palestinian negotiators, Saeb Erekat and Mohammad Shtayyeh, announced their resignation from the talks, although it is not clear if Palestinian president Mahmoud Abbas will accept their requests. It is the second time the two have attempted to resign in the past month.

On top of that, a 19-year-old Israeli soldier was stabbed to death Wednesday by a 16-year-old Palestinian as the two rode on a bus in northern Israel. The Palestinian, who hails from the West Bank town of Jenin, was apparently in Israel illegally.

The killing prompted calls by Israeli politicians to abort the peace process.

"These ongoing talks are deluding both the Israeli public as well as the Palestinians," said deputy defence minister Danny Danon, an influential extreme nationalist in the ruling Likud party. "We must put an end to this obvious collision course."

Tensions over settlement construction are at the heart of a fundamental dispute within the country's governing coalition.

Housing Minister Uri Ariel is a member of the pro-settlement Jewish Home party. His appointment to the portfolio was one of the conditions made by party leader Naftali Bennett in joining the coalition government.

Mr. Bennett, 41, a wealthy software entrepreneur, brought the radical-right party from relative obscurity a year ago to a strong showing in January's election – winning 12 of the 120 Knesset seats – and a prominent place in the current government. Mr. Bennett strongly opposes the creation of a Palestinian state and wants Israel to annex some 62 per cent of the West Bank.

Complicating matters further, Avigdor Lieberman, who resides in a West Bank settlement south of Bethlehem, joined the government as Foreign Minister this week after being acquitted on charges of corruption. Mr. Lieberman, known for his take-no-prisoners approach to diplomacy and his one-man rule over the Yisrael Beiteinu party, insists he be put in charge of negotiations with the Palestinians.

Until now, Justice Minister Tzipi Livni, a proponent of the two-state solution, has been managing the so-far fruitless talks.