RAMALLAH, West Bank, March 10 (Reuters) - US Vice President Joe Biden publicly condemned on Wednesday Israel's new plan to build 1,600 homes for Jewish settlers, saying on a West Bank visit the project undermined Washington's peace efforts.

It is incumbent on both parties to build an atmosphere of support for negotiations and not to complicate them, Biden said in a media statement alongside Palestinian President Mahmoud Abbas in the West Bank city of Ramallah.

Yesterday the decision by the Israeli government to advance planning for new housing units in East Jerusalem undermines that very trust, the trust that we need right now in order to begin ... profitable negotiations, Biden said.

In Jerusalem, an Israeli cabinet minister apologised for what he termed real embarrassment caused to Biden by the news on Tuesday that Israel would erect the housing units in an area of the West Bank it annexed to the holy city.

Abbas called on Israel to reverse its decision, but in his remarks in Ramallah gave no indication that indirect peace talks, agreed by Palestinian and Israeli leaders after US mediation, would not proceed.

Biden said the United States would hold both sides accountable for any statements or actions that inflame tensions or prejudice the outcome of talks, as this decision did.

No date, venue or agenda has been set for the negotiations that would mark a revival of talks suspended since December 2008. The Arab League in Cairo, which last week endorsed a four-month framework for the talks, called an urgent meeting of a committee overseeing the process, for later on Wednesday.

Biden's public remarks on the issue followed a written statement of condemnation that he issued on Tuesday.

SECURITY

Israel's announcement of the project clouded a visit by the vice president that had been focused on reassuring Israelis that President Barack Obama was committed to their security in the face of a possible Iranian nuclear threat.

This is a moment of great challenge to the effort by the United States to get the political process going again, Palestinian Prime Minister Salam Fayyad said at a meeting with Biden.

Aides to Israeli Prime Minister Benjamin Netanyahu said he had been blindsided by the project's announcement by the Interior Ministry, run by Shas, an ultraorthodox, nationalist party that is a key member of his governing coalition.

Netanyahu ordered in November a 10-month halt to new housing starts in West Bank settlements but exempted those Israel considers part of Jerusalem and projects for Jewish homes in the eastern sector of the city captured in 1967.

Abbas had demanded a total settlement freeze as a condition for re-engaging with Israel. Palestinians say settlements will deny them a viable state, which they hope to establish in the West Bank and Gaza Strip.

Messages have been sent to Biden and the Americans that there was no intention to undermine him, a senior Israeli official said. We were genuinely surprised, just as surprised as the Americans.

Netanyahu took no steps to reverse the decision to build in Ramat Shlomo, a religious Jewish settlement. Israel considers all of Jerusalem its indivisible and eternal capital. Palestinians want East Jerusalem as the capital of a future state.

Shas's promotion of the plan was an indication to the Obama administration of the problems Netanyahu would face within his government should he make bold moves, as Washington has demanded, towards a land-for-peace deal with Palestinians.