CAIRO: Israeli Prime Minister Benjamin Netanyahu held talks in Cairo on Tuesday with Egyptian President Hosni Mubarak on US efforts to revive stalled Middle East peace negotiations.

Neither leader spoke after the meeting although Netanyahu's office said afterwards that "the talks were in-depth and friendly."

"The two leaders discussed ways to kickstart the peace process with the Palestinians and the efforts to return Gilad Shalit," an Israeli soldier captured by Gaza militants three and a half years ago, said the statement from Netanyahu's office.

"The Egyptian president expressed his commitment to advance peace," it said.

The encounter, however, was overshadowed by Israel's announcement that it had invited tenders for the construction of hundreds of new homes for Jewish settlers in annexed Arab east Jerusalem, which drew an angry rebuke from Egypt.

Foreign Minister Ahmed Abul Gheit, who was to address a press conference later, said that continued settlement construction by Israel in the occupied territories was "torpedoing the efforts being made to relaunch negotiations aimed at establishing a Palestinian state."

"Such behaviour raises questions about the serious willingness of Israel to reach a definitive agreement and leads one to believe that Israel is trying to welch on its obligations for a just and lasting peace," he said in a statement carried by the official MENA news agency.

Israel has invited tenders for the building of 692 new homes in the Jerusalem settlements of Neve Yaacov, Pisgat Zeev and Har Homa, the independent Channel 10 television reported on Sunday.

The announcement prompted key ally the United States to express its opposition and the European Union to call for a rethink.

The Egyptian foreign minister had identified the future of east Jerusalem, which Israel captured in the 1967 Middle East war and later annexed in a move never recognised by the international community, as one of the key issues that Mubarak would raise in his talks with the Israeli prime minister.

"We will listen to his points of view and we will inform him that a fair settlement must be reached on the Palestinian refugee problem and east Jerusalem," Abul Gheit said.

He said he would visit Washington in January for talks on the peace process as US President Barack Obama's administration was said to be drafting letters of guarantee for Israel and the Palestinians to serve as a basis for relaunching the talks which have been stalled for almost a year.

"US special envoy George Mitchell will present two draft letters of guarantee, one for Israel and one to the Palestinian Authority during his next visit to the region," one Arab diplomat in Cairo told AFP.

"The United States is hoping that the two letters will serve as a basis for the relaunch of Israeli-Palestinian negotiations but we don't know if they will satisfy the Palestinians, who want a complete freeze of settlement activity before talks resume," the diplomat said.

Washington was currently in talks with the Palestinians and Egypt -- a key US ally in the region -- over the letters, a Western diplomat said.

Former Israeli left-wing MP Yossi Beilin told AFP that Netanyahu was nearing an agreement with the US administration on the principles of the negotiations.

These principles include "a real, albeit indirect commitment by Netanyahu to negotiate Palestinian demands to return to the 1967 borders," including the future status of Jerusalem, according to Beilin.

Netanyahu was also ready to accept the US demand that the peace negotiations would be limited to 24 months, said Beilin, who was among the initiators of the 1993 Oslo accords.

Netanyahu's spokeman Mark Regev said in reaction that "Mr. Beilin only speaks for Mr. Beilin."

Egypt had already asked for written US guarantees before peace talks resume, in order to ensure their aim is the establishment of a Palestinian state within 1967 borders.