The prime minister on Sunday ended a legal battle and opened a diplomatic one when he and the Ministry of Housing and Construction approved a 750 unit project for a new haredi neighborhood in the Givat Ze'ev settlement just north of Jerusalem. For the initial stage of the project known as Agan Ha'ayalot, contractors were given permission to begin work on 330 units and to complete 200 units on which work had already begun before the project was frozen in 2000, according to the Construction and Housing Ministry. But the intent, the ministry spokesman said, was to allow for completion of all 750 units. The move, which is the first approval of its kind in more than six months, comes amid a legal battle over the project, which could have cost the state NIS 1.5 billion, and in advance of Thursday's visit by US Lt.-Gen. William Fraser III. Fraser is charged with monitoring road map compliance and is likely to hold his first joint meeting with Israelis and Palestinians. Under the road map, Israel is required to freeze settlement activity. Prime Minister Ehud Olmert's spokesman Mark Regev told The Jerusalem Post that Israel has been "very up-front," both before and after the Annapolis conference in November, that there would be no settlement freeze in the large settlement blocs that it would hold onto under any agreement with the Palestinians. Givat Ze'ev - five kilometers from Jerusalem - falls in that category, Regev said. "No one should be surprised, because we have been up-front, consistent and very public that we did not commit to any settlement freeze in the large settlement blocs," he said. At the same time, Regev said, the Olmert government has been scrupulous in not building in areas outside the settlement blocs. Regev said Olmert decided to okay the project both because it was within the large settlement blocs, and because it had been in the hands of the private sector for almost a decade, and reversing a decision made in 1999 to build the project would have been legally and financially difficult. Some sources within Olmert's Kadima party said they believed the move was linked to Thursday's terrorist attack in Jerusalem in which a Palestinian gunman killed eight students as they studied in the Mercaz Harav Yeshiva library. But a senior official in the Prime Minister's Office denied that there was a connection and told the Post that the decision was made prior to the attack. The source said it was linked instead with Olmert's interest in keeping Shas in the coalition. According to this source, Shas had pushed hard for the project - which is expected to attract Shas constituents - for some time. Officials in the Foreign Ministry, meanwhile, said that while the decision was covered widely in the Arab press on Sunday, Jerusalem had not yet received questions or heard criticism from capitals around the world about the issue. The officials, however, pointed out that the decision was announced on a Sunday, when most foreign ministries abroad were not working. Palestinian negotiator Saeb Erekat condemned the construction plans, saying it undermined already troubled peace efforts. "Why do they insist on doing this and humiliating Abu Mazen [Palestinian Authority President Mahmoud Abbas] in front of the Palestinian public," he said. Erekat said he had appealed to the US to pressure Israel to halt the project. Construction and Housing Minister Ze'ev Boim (Kadima) said Sunday that the project would help ease the housing crunch in the Jerusalem area. He added that it was his intention to continue with a policy that would strengthen the capital and answer its demographic needs. According to attorney Shlomo Gan-Zvi, the state was in a difficult legal position with regard to Agan Ha'ayalot, which is considered a state project and which had first been approved in 1999. At that time the government made agreements with contractors who purchased the property from the state and with the understanding that it was permitted and could be completed and sold, said Gan-Zvi, who is a member of the Legal Forum for Israel and who represents the contractors in the project. The project, however, was frozen in 2000 at the start of the second intifada, when violence along Route 443 that leads to Givat Ze'ev made it hard to attract investors and buyers, Gan-Zvi said. Eventually, after the state had already invested millions in infrastructure, including roads to the site, the contractors asked the state to reimburse them and to release them from the project, which they now considered too difficult to market, Gan-Zvi said. The state refused, he added. The contractors eventually found new investors and buyers by targeting the ultra-orthodox market, he said. The state then turned around a few months ago and refused to renew the initial agreements, which had since expired, said Gan-Zvi. At that point the contractors sued again and claimed the state could not both refuse to reimburse them and refuse to let them build. A settlement in the case could have cost NIS 1.5b., he added. The Council of Jewish Communities of Judea, Samaria and the Gaza Strip cautiously welcomed the project's approval. Dani Dayan, who heads the council, said that of course he was pleased that the project had finally been authorized, but added, "It is too little, too late." It was his understanding, Dayan said, that the approval was limited to this project and did not change the overall fact that the government had frozen new permits for construction in Judea and Samaria. The authorization comes amid media reports of an upcoming deal between settlers, the government and the Defense Ministry on removal of some unauthorized outposts. There was speculation in the media on Sunday that the project approval was part of that deal, a notion that was rejected by the spokesman for both Defense Minister Ehud Barak and Dayan. "It's not connected to the outposts, not at all," Dayan told the Post. AP contributed to this report.