The proposal has stung the Israeli Government

The offer falls far short of the complete settlement freeze which the Palestinians and the Mitchell report are calling for.

But the fact that it has been made shows that the Israeli Government does not want to appear totally inflexible on this highly sensitive issue.

The report of the Mitchell fact-finding mission has ensured that this is an issue which none of the parties can ignore.

Among recommended confidence-building measures is the proposal that Israel "should freeze all settlement activity, including the 'natural growth' of existing settlements".

Click here to see graphs showing the growth of settlements

The report adds that the security co-operation which Israel is seeking from the Palestinians "cannot for long co-exist with settlement activity".

Israeli justification

The proposal has stung the Israeli Government of Prime Minister Ariel Sharon, especially since the Bush administration in Washington has warmly welcomed the Mitchell report.

The Palestinians want a complete freeze on settlement building

Mr Sharon has long been a champion of the Israeli settler movement and is firmly opposed to a complete freeze of settlement activity.

Hardline Israelis justify the building of settlements on either religious or political grounds.

For the religious, Jews must have the right to settle on any part of the biblical Holy Land. For right-wingers, the aim is to create and hold onto a Greater Israel.

Palestinian frustration

For Palestinians, in contrast, the issue goes to the heart of the injustice they believe they have suffered since Israel's creation in 1948.

Palestinians see the continuation of settlement-building as one of the most glaring flaws in the peace process

They view the West Bank and Gaza as the territorial basis of a future Palestinian state. And they see the building of new settlements, and the expansion of existing ones, as a blatant attempt to limit the size of such a state - or even prevent it emerging at all.

They also see the continuation of settlement-building as one of the most glaring flaws in the peace process which has been under way since the Israeli-Palestinian agreement reached in Oslo in 1993.

Indeed it has led many of them to lose faith in the Oslo process altogether.

Firm stand

Now that the issue of settlements is so firmly on the agenda, the Palestinians are determined to keep it there. This explains their swift rejection of the Israeli offer to limit, but not totally freeze, settlement activity.

They are, first, suspicious of Israeli intentions, fearing that to accept further "natural growth" of existing settlements would give Israel a loophole it could exploit.

Second, they want the United States to give its firm backing to the Mitchell report's call for a full freeze - or, better still, to make such a call a central ingredient of a new US peace initiative.

Colin Powell, the US Secretary of State, has hinted at such a possibility.

But the Palestinians suspect the Bush administration may be unwilling to risk open confrontation with the Israelis on the issue.

The Bush administration still has no clear policy on the Israeli-Palestinian dispute. It has relied largely on telephone diplomacy to pursue its twin aims of curbing the violence of the last eight months and getting peace talks going again.

But with no sign of the violence ebbing, and with the death toll well over 500, these efforts have clearly failed.

Many observers believe the Mitchell report provides the Bush administration with a cue for more active intervention in a crisis which is fast spinning out of anyone's control.

Less clear is whether senior US officials are ready to play such a role.