JERUSALEM, April 26 (Reuters) - Israel's main opposition party said on Monday the government has quietly frozen approval of Jewish housing projects in East Jerusalem in a bid to heal a rift with Washington and coax the Palestinians into peace talks.

I am talking about a fact. I checked it out. All of the work of the Jerusalem district planning committee has been frozen completely, except for the veteran neighbourhoods, legislator Roni Bar-On of the centrist Kadima party said in parliament.

He said he was using the term veteran neighbourhoods to refer to areas of Jerusalem that were under Israel's control before it captured the eastern part of the city, along with the West Bank and Gaza Strip, in a 1967 war.

Why don't you tell us the whole truth, Mr Prime Minister, Bar-On asked, calling a de facto freeze the right move to make to narrow differences with Washington over settlements and get peace talks, suspended since December 2008, under way.

The planning committee, an Interior Ministry body, embarrassed Prime Minister Benjamin Netanyahu last month -- during a visit by US Vice President Joe Biden -- when it approved construction of 1,600 homes for Jews in a part of Jerusalem that Israel annexed after the 1967 conflict.

News of the planned project led the Palestinians to rescind their agreement to begin indirect peace talks with Israel under US mediation and insist on a settlement freeze first.

Netanyahu has insisted publicly that he would not curb Jewish housing construction anywhere in Jerusalem, restrictions that could cause cracks within a governing coalition dominated by pro-settler parties, including his own Likud.

Asked about a de facto building freeze, Mark Regev, a spokesman for Netanyahu, said there had been no fundamental change in government policy on construction in Jerusalem.

We have instituted a new mechanism which is being put in place so that we don't have mishaps as happened during the Biden visit, Regev said about a step Israel has already announced.

OVERSIGHT

Regev did not elaborate, but Israeli media said a representative of the prime minister's office would attend planning committee meetings to ensure high-level oversight.

Pro-settler politicians have complained publicly that since approving the housing project last month, the committee has been avoiding any discussion of further Israeli construction in and around East Jerusalem.

Israel considers all of Jerusalem its capital, a claim that is not recognised internationally. Palestinians want East Jerusalem as the capital of a state they intend to establish in the West Bank and Gaza Strip.

Palestinian sources said on Sunday that US envoy George Mitchell proposed a compromise in which the Palestinians would begin indirect talks in return for an unwritten commitment by Washington to assign blame publicly to any party that took action compromising the negotiations.

The formula appeared to envisage a situation in which Israel could quietly delay implementing housing projects in and around East Jerusalem -- construction which Washington has said could jeopardise peacemaking -- without declaring a freeze.

Mitchell, who held three days of talks with Israeli and Palestinians leaders last week, is due to return for further meetings next week. Netanyahu said on Sunday it should become clear soon whether peace talks would begin.