Israel announced new home building in east Jerusalem, which Palestinians claim for their future state, just hours after freeing more prisoners as part of a deal to set peace talks in motion.
The building is seen as an attempt by prime minister Benjamin Netanyahu to make up for the prisoner release, for which he has been sharply criticised at home. The Palestinian prisoners were jailed for deadly attacks on Israelis.
The release of 26 Palestinians after midnight on Tuesday was the second of four prisoner releases meant to restart Israeli-Palestinian talks in an effort to reach a final agreement between the two sides.
The Palestinians had long refused to resume peace negotiations with Israel unless it ends construction in territories that Palestinians seek for their state. Israel refused, insisting that settlements and other core issues, including security, should be resolved through negotiations.
The prisoner release was part of an agreement brokered by US Secretary of State John Kerry, which brought Israel and the Palestinians back to the negotiating table after a five-year hiatus. The talks had been paralysed since 2008.
Earlier this year Mr Kerry managed to persuade Palestinian president Mahmoud Abbas to drop the settlement issue as a condition for restarting negotiations. In exchange, Israel agreed to the prisoner release. In all, 104 Palestinian convicts are to be released in four rounds over the coming months.
The new east Jerusalem building plan angered the Palestinians but it was not clear if it would directly impact the talks, which are taking place behind closed doors as both sides had agreed.
Thousands of Palestinians have been held in Israeli prisons since Israel's capture of the West Bank, Gaza and east Jerusalem in the 1967 Middle East war, many jailed on charges ranging from throwing stones to killing civilians in bombings, shootings and other attacks. The Palestinians want those territories for their future state. The prisoners released in the latest batch were all held by Israel for murder.
Israel has a long history of lopsided prisoner exchanges with its Arab adversaries. But this week's release appeared especially charged because Israel is receiving little in return except for the opportunity to conduct negotiations that few people believe will be successful.
The fate of the prisoners is a deeply emotional issue in Palestinian society. After decades of fighting Israel, many families have had a member imprisoned and the release of prisoners has been a long-standing demand. Israelis mostly view them as terrorists because of the Palestinians grisly attacks on Israelis including civilians.
But the prisoner issue is extremely painful for Israelis whose loved ones were killed in attacks. Relatives of those killed had appealed against their release and held protests.