Palestinians issued a formal protest of the expansion. They called the move a sign that Israeli Prime Minister Ehud Barak isn't willing or able to make the concessions necessary for peace.
But there was also an encouraging sign Monday when Israel's chief negotiator, Oden Eran said a "Palestinian state will be the outcome of the negotiations."
Eran often speaks for Barak. And as Barak has never publicly said he supports the creation of a Palestinian state, Eran's remarks appeared to catch other Israeli officials by surprise.
Officials close to Barak, when pressed for comment, would not rule out a Palestinian state as a possible outcome of peace talks. But, eager to soften the impact of an apparent concession, they played down the significance of Eran's remarks.
"The prime minister asked him to avoid saying things that are in dispute," a source in Barak's office said in Jerusalem.
Palestinians see peace moves launched with Israel in 1993 as culminating in the creation of an independent state on all of the West Bank and Gaza Strip captured by Israel in the 1967 Middle East war.
Cabinet Minister Haim Ramon insisted there was nothing new in what Eran said and that a de facto Palestinian state existed anyway. Barak's aides stuck to an official line that the sides were negotiating the nature of a Palestinian "entity."
Asked about the significance of Eran's using the word "state," Barak's spokesman Gadi Baltiansky said, "Since there is no change in the Israeli position, I wouldn't attribute any significance to one word or another.
"The nature of the Palestinian entity will be negotiated between us and the Palestinians," he said.
Palestinian President Yasser Arafat has said he aims to establish a state in the West Bank and Gaza Strip by Sept. 13, the target date for forging a peace treaty resolving all of the toughest issues, including borders.
Asked for his response to Eran's remarks, Yasser Abed Rabbo, the chief Palestinian negotiator to the talks, said "If he says that, that's good."
After meeting Australian Prime Minister John Howard in Palestinian-ruled Gaza, Arafat told reporters, "It needs to be made clear that a Palestinian state is the natural right of the Palestinian people."
But in a move that has outraged the Palestinians, Israel has signaled that the expansion of the largest Israeli settlement in the West Bank will go ahead.
Sunday, some Jewish settlers clashed with Israeli troops who tried to evict them from disputed land near Hebron. The settlers said they had a right to start building on the land as it is Jewish-owned.
The settlers had placed a shipping container on the land overlooking Tel Romeid. Soldiers and police arrived on the scene early in the morning to evict the squatters.
The settlers tried to prevent the authorities from doing so some barricaded themselves inside the rust-colored structure, while others handcuffed themselves to its roof.
Officials used boltcutters to free the protesters, but scuffles erupted when the activists were dragged away.
Among those carried from the scene were mothers holding infants.
The settlers said setting up the container on the land near Tel Romeida which they claim was stolen from the Jewish community was also a protest against Israeli concessions to the Palestinians.
The action came hours before the latest round of peace treaty talks were to resume Sunday in the southern Israeli resort town of Eilat.
If the Israelis and Palestinians are to meet their target September 13 deadline for an overall accord, they will have to settle their differences over Jewish settlements in addition to other thorny issues, such as the status of Jerusalem and the concept of a Palestinian state.