Prime Minister Netanyahu has finally responded to the demands laid out by US Secretary of State Hillary Clinton, following the latest diplomatic row between Israel and the international community when it was announced the building of houses within East Jerusalem would continue unabated.

The announcement was especially embarrassing for the US, as it came in the middle of a high-profile visit by Vice-President Biden.

Clinton demanded that the continued construction be cancelled and that the Prime Minister make a confidence building gesture toward the Palestinians, among other requests.

The Prime Minister has agreed only to the latter.

He refused to cancel the construction of 1,600 settler homes, and it is this which is at the heart of the issue. He instead offered to delay their construction, an offer which was apparently already made and rejected by Washington.

The Quartet – a grouping of the US, Russia, the UN, and the EU – has forcefully condemned Israel’s construction plans, saying that its actions were not conducive to peace efforts.

Israel has been accused by some of deliberately provoking Palestinian militant groups.

"Netanyahu thinks that Obama has blinked, but he's wrong," a diplomatic source said. "This is not over yet."