Palestinian leaders, who swiftly denounced Mr Sharon's restatement of the plan, see the project to build in the two-mile "E-1" corridor between the existing settlement and Jerusalem as a further step to isolate the Arab eastern sector of the city from the West Bank and undermine its viability as the capital of a future Palestinian state.

A participant at the meeting between Mr Sharon and the Knesset's Foreign Affairs and Defence Committee told the Associated Press that Mr Sharon had declared: "There is a need to carry out construction in E-1. This programme has been in existence for 10 years. We should definitely move ahead with it." The source said Mr Sharon had given no date for beginning the project, for which some preliminary clearance work has already been carried out. In a concession to the Palestinians, Mr Sharon told the committee the two sides were discussing the release of a further 400 prisoners.

The Prime Minister's remarks on Ma'ale Adumim are the clearest signal yet of growing Israeli confidence that despite initial verbal objections to the expansion project, the US administration does not intend to make an issue of the plan, let alone threaten to apply any sanctions to halt it.

The senior Palestinian negotiator, Saeb Erekat, who has already written to international leaders urging them to halt the project, said yesterday: "If carried out, this E-1 project will destroy the peace process and will undermine prospects for any future negotiations on the final status agreements. We call upon the US to stop this project if they want to give the peace process a chance."

Mr Sharon is expected to argue at his meeting with Mr Bush at the President's ranch in Crawford, Texas, that the latter's acceptance last April that the big Jewish "population centres" in the occupied West Bank should remain within Israel in any final peace deal also applies to future expansion of Ma'ale Adumim.

When the Israeli government's intentions to go ahead with the Ma'ale Adumim expansion plan first resurfaced last month, Condoleezza Rice, the US Secretary of State, told The Los Angeles Times that it was at "odds with ... American policy". But she was then forced into modifying her stance after a diplomatic row which followed leaked - and disputed - remarks attributed to the US ambassador in Tel Aviv, Dan Kurtzer, in which he was reported to have questioned whether the "understanding" reached between Mr Bush and Mr Sharon last April meant that the biggest settlements would necessarily remain Israel's in perpetuity.

Officials close to Mr Sharon were reported at the time to have blamed government dissidents for the leak, saying that it was an attempt to sabotage his plan to disengage from Gaza by indicating that the Prime Minister was receiving nothing in return. But if so it appeared to backfire badly by if anything strengthening Mr Sharon's hand with Washington. Paul Patin, the American embassy's spokesman, said yesterday that the US administration continued to hold Israel to its commitments under the internationally agreed road map to peace.

He added last night that "the issue for Jerusalem is one for final status negotiations between the parties".

The road map stipulates an Israeli freeze on settlement construction as well as Palestinian steps to dismantle the armed factions' "infrastructure". But Israel has reinterpreted the road map to insist that the Palestinian requirement is a precondition of the road map's operation rather than a step within it.

Efforts by the Palestinian President, Mahmoud Abbas, to crack down on militants are being hampered by a struggle he is having with the young warlords of the al-Aqsa Martyrs' Brigades. After 15 rebellious gunmen fired on the Muqata presidential compound in Ramallah last Thursday night and ransacked four restaurants patronised by senior Palestinian officials and their families, Mr Abbas dismissed Haj Ismail Jaber, chief of armed forces on the West Bank, and the Ramallah district commander, Yunis al-Has. He is expected to sack or pension off dozens more.

"The security apparatus did not do its job," Mr Abbas told a public meeting in the administrative capital at the weekend, "so it was crucial to take a stand. We will not allow anyone to take the law into his own hands and sabotage our situation." Mr Abbas has refused to accept the resignation of his West Bank intelligence chief, Tawfiq Tirawi, who accused the other commanders of lying. "They are hiding from you the truth about the security chaos," he is reported to have told Mr Abbas. "Many of them are avoiding carrying out their duties."