WASHINGTON, March 12 (Andrew Quinn/Reuters) - US Secretary of State Hillary Clinton warned Israeli Prime Minister Benjamin Netanyahu on Friday his government sent a deeply negative signal by taking steps that undermined renewed Middle East peace talks.

Clinton telephoned Netanyahu and expressed frustration over Israel's announcement on Tuesday of new settlement construction, a move that deeply embarrassed visiting U.S. Vice President Joe Biden and imperiled U.S. plans to launch indirect negotiations between Israel and the Palestinians.

During an interview in New York with CNN, Clinton said the developments did not put the U.S.-Israeli relationship at risk, calling it durable and strong. But Clinton, using unusually harsh language, added, The announcement of the settlements on the very day that the vice president was there was insulting.

State Department spokesman P.J. Crowley said Clinton told Netanyahu the announcement was a deeply negative signal about Israel's approach to the bilateral relationship ... and had undermined trust and confidence in the peace process.

The secretary said she could not understand how this happened, particularly in light of the United States' strong commitment to Israel's security, Crowley said.

She made clear that the Israeli government needed to demonstrate not just through words but through specific actions that they are committed to this relationship and to the peace process, he said.

The quartet of Middle East peace mediators -- the United States, the European Union, the United Nations and Russia -- issued its own condemnation on Friday of the settlement plan and said it would assess the situation at a previously scheduled meeting in Moscow next week.

The Quartet has agreed to closely monitor developments in Jerusalem and to keep under consideration additional steps that may be required to address the situation on the ground, the group said in a statement, without providing further details.

Clinton, speaking in New York during talks with U.N. Secretary-General Ban Ki-moon, said the Moscow meeting would be an opportunity to take stock of the progress that has been made in moving toward relaunching negotiations.

A REBUKE

Clinton's rebuke of Netanyahu capped a week of tense exchanges between the United States and Israel, which announced it was building 1,600 settler homes in an area of the occupied West Bank it annexed to Jerusalem.

The announcement infuriated the West Bank-based Palestinian leadership, which threatened to pull out of U.S.-brokered indirect proximity talks with Israel that Washington hoped would be the first step toward relaunching full peace negotiations after more than a year.

It also embarrassed Biden, who repeated calls for talks despite Palestinian demands that Israel first cancel the settlement project.

But in an interview with Reuters on Friday aboard his plane, Air Force Two, Biden sounded upbeat about the prospects of launching indirect peace talks mediated by the United States despite tensions over Israel's announcement.

Asked whether he believed Netanyahu was sincere about negotiating peace with the Palestinians, he said, Yes, I do.

Crowley said U.S. Middle East peace envoy George Mitchell and Assistant Secretary of State Jeffrey Feltman had made numerous calls to regional leaders, including Palestinian President Mahmoud Abbas, and underscored commitment to the plans for the indirect talks.

Mitchell is due to return to the region next week and U.S. officials hope the indirect talks might begin then.

Israel has so far balked at Palestinian demands that the indirect phase include talk of final status issues including the delineation of borders, the fate of Jewish settlements on the West Bank and the status of Jerusalem.

The Obama administration wants indirect talks to cover issues of consequence but has yet to spell out publicly what that would entail.

Palestinians have called the settlement announcement a deliberate attempt by Netanyahu to sabotage peace talks in which he could come under pressure to trade land for a deal.

Netanyahu has said he did not know the announcement was coming and castigated his interior minister, while noting that nothing would actually be built in the area for years.

But his relationship with the Obama administration was already under heavy strain, and Clinton made clear that Washington would hold him responsible.

Well, I don't have any reason to believe he knew about it, but he is the prime minister. It's like the president or the secretary of state; when you have certain responsibilities, ultimately, you are responsible, Clinton told CNN. (Additional reporting by Megan Davies in New York; Editing by Peter Cooney)