JERUSALEM, March 29 (Dan Williams/Reuters) - The Obama administration's pressure on Israel to curb settlement activity will bolster Palestinian hardliners and hinder peace efforts, a senior Israeli cabinet minister said on Monday.

Tensions with Washington flared three weeks ago, and have simmered unresolved since, over the announcement of an Israeli blueprint for 1,600 more homes for Jews in areas of the occupied West Bank that Israel annexed to East Jerusalem.

The Palestinians, who want statehood in the West Bank and Gaza with a capital in East Jerusalem, backed out of planned US-mediated peace talks with Israel, demanding the new project be scrapped.

Benny Begin, a member of Israeli Prime Minister Benjamin Netanyahu's inner cabinet, described Washington's scrutiny on Jerusalem as departing from previous U.S. administrations' view that the city's status should be resolved in peace negotiations.

It's bothersome, and certainly worrying, Begin told Israel Radio. This change will definitely bring about the opposite to the declared objective. It will bring about a hardening in the policy of the Arabs and of the Palestinian Authority.

This month's diplomatic deadlock has seen a spike in Israeli-Palestinian violence in the West Bank, as well as in the Gaza Strip, whose Islamist Hamas rulers spurn the Jewish state and deride Palestinian President Mahmoud Abbas's peace strategy.

Hoping to salvage negotiations, the United States has been seeking unspecified goodwill gestures from Israel toward the Palestinians.

A senior Israeli official said these included assurances regarding East Jerusalem, where Netanyahu has refused to stop building. Israel regards the entire city as its eternal and indivisible capital, a claim not recognized internationally.

BARAK BREAKS WITH BEGIN

US President Barack Obama gave Netanyahu an unusually frosty reception at White House talks last week, denying him the traditional photo opportunity or joint statement.

Begin's misgivings about the Obama administration have been echoed by others in the seven-member inner cabinet, which guides policy and is dominated by right-wingers including the premier.

Begin, son of the late right-wing Prime Minister Menachem Begin, is on record as opposing a Palestinian state in the West Bank, which Israel captured along with Gaza in a 1967 war and peppered with Jewish settlements.

Israel quit Gaza in 2005 but vows to keep West Bank settlement blocs under any accord.

Defence Minister Ehud Barak, the lone left-winger in the inner cabinet, has taken a different tack on the U.S. spat.

The U.S. administration is looking for an answer to the question of whether Israel is energetically and seriously going along with it toward broad understandings in the diplomatic process, he told reporters on Sunday.

In other words, direct talks on core questions, he said. This is the question bothering the U.S. administration more than the concrete requests ... that are still being discussed in the contacts between us.

Netanyahu has offered the Palestinians direct negotiations without preconditions. But, to Abbas's chagrin, he has made clear that Israel would only accept a Palestinian state shorn of some sovereign powers and which recognized Israel as a Jewish state.

The feud with Washington put Netanyahu in a political bind. Meeting any U.S. demands on settlements -- after a 10-month partial construction freeze he announced in November -- could endanger his coalition and bolster the centrist opposition.

Netanyahu's Likud party has fallen behind the opposition Kadima in polls this month, for the first time since last year's election. A survey in Friday's Maariv newspaper suggested Likud would take 28 of parliament's 120 seats if a ballot were held now, against 29 to Kadima.

(Editing by Paul Taylor)