Prime Minister Ehud Olmert's announcement Monday that Israel would continue building in the east Jerusalem neighborhood of Har Homa cast a shadow on talks later in the day between Foreign Minister Tzipi Livni and Palestinian negotiator Ahmed Qurei, according to government officials. Following Olmert's statement during a press conference with visiting German Chancellor Angela Merkel, Qurei made it known that he was downgrading his meeting with Livni to an "unofficial" one, and said the Palestinians would not agree to Israel adding a "single brick" in east Jerusalem or the settlements. Olmert said that Merkel spoke to him at length about the illegal outpost issue, and that he made clear that Israel neither builds new settlements nor expropriates any new land in the West Bank. With that, Olmert added, "everybody knows that there is no chance that Israel will give up a neighborhood like Har Homa, it is an integral part of Jerusalem. The Palestinians know it, the international community knows it, everyone knows it." According to Israeli sources, Qurei protested these comments during his meeting with Livni - the first announced meting between the two since PA President Mahmoud Abbas suspended negotiations with Israel following the upsurge in violence in Gaza over two weeks ago. Livni and Qurei, however, have reportedly met once in secret since that time. According to Israeli sources, Monday's meeting was held in private and lasted for some two hours. Keeping in line with a policy decision taken when the negotiations started earlier this year, no details of the meeting were released. Olmert, at his press conference with Merkel, said he and the German chancellor discussed the negotiations, and that he recommitted himself to trying to reach an agreement with the PA by the end of the year. At the same time, he said he had made it clear Israel would continue to take military action against terrorists. Merkel said that certain factors hindered the Israeli-Palestinian peace negotiations. "The rocket fire at the South is an obstacle, and so is construction in the settlements," she said. Conceding that the circumstances surrounding illegal outposts were more complex than they appeared, Merkel nevertheless urged both the Israelis and Palestinians to fulfill their commitments. Olmert said that last week, Israel dismantled two outposts, and added that the move had gone largely unnoticed by the media. Regarding Iran, which was a focus of discussion between the two leaders over the last two days, Merkel urged the world to continue pressuring Teheran and said the Islamic Republic must act with more transparency regarding its nuclear program. She reiterated that threats against Israel were, in effect, also threats against Germany, a comment she had made prior to her departure from Germany for Israel. The chancellor said that it was up to Iran to prove it was not developing nuclear weapons. Livni, meanwhile, told the Knesset that terrorist attacks would not stop her negotiations with the Palestinians. Addressing a no-confidence motion in the Knesset over Olmert's decision to resume peace talks in the wake of the March 7 terror attack at Mercaz Harav Yeshiva in Jerusalem, Livni said that continuing negotiations was of the utmost importance. "Israel will continue to negotiate with more the pragmatic parties among the Palestinians," said Livni. "Such negotiations do not give anyone sanction to carry out terror attacks against Israel, not do they mean that Israel will stop waging its fight against terror. Conversely, terrorism is no excuse to cease negotiations." The foreign minister said that Israel cannot allow terrorism to be used as an excuse to end negotiations, just like the Palestinians cannot use IDF operations in the Gaza Strip as an excuse to freeze the diplomatic process. Livni also addressed talk about the current lull in violence in the Gaza Strip. Israel cannot delude itself into thinking that the quiet would continue, she said, adding that terror groups were busy arming themselves for the next upsurge. "Since the Palestinian government has no ability to control what takes place in Gaza, it is obligated to let Israel act to defend its citizens," Livni said. She emphasized that the Gaza Strip constituted a growing threat due to arms smuggling activities and foreign influence. "Weapons are flowing from Iran through Egypt and into Gaza, and we are not able to continue to live with this situation, as if nothing is happening," she said "Only if we fight terror on the one hand, and conduct peace negotiations on the other, will we come to a final settlement," she said. In a related development, US Ambassador Richard H. Jones, on a tour Monday of Mea She'arim, told The Jerusalem Post the US was "concerned about where things are built in Jerusalem." Referring to the overcrowded haredi neighborhoods in Jerusalem, Jones said he was aware of the shortage of housing. But added, "Sometimes people do have to move to a different location. They cannot always stay close to their families." Commenting on Israeli settlements beyond the Green Line, Jones said that "Israel has commitments and it is important that they begin honoring those commitments and that is part of a dialogue, part of the Annapolis process, part of the implementation of the road map." Matthew Wagner contributed to this report.