The Palestinians have said that newly announced Israeli plans to build more than 300 apartments in the Har Homa neighbourhood threatened to undermine the talks.
Settlement expansion in Har Homa, known to the Palestinians as Abu Ghneim, just north of Bethlehem, in 1997 led to a collapse in peace talks at that time.
Previously, some Palestinian officials called for a boycott of the meeting after Israel issued a tender for about 300 new homes near Jerusalem on land it annexed - a move not internationally recognised - during the 1967 Middle East war.Palestinian outrage
Saeb Erekat, the chief Palestinian negotiator, said his delegation "introduced the issue of Har Homa and expressed our outrage".
He said: "If you want to restore the credibility of the peace process, the Israeli government must revoke this order."
Erekat said the Israelis raised concerns about security issues, including ongoing rocket attacks from the Gaza Strip.
Israel pledged at the Annapolis meeting in November to end settlement activity, but maintains that the building plan, which provoked rare criticism from Washington, is legal.
Condoleezza Rice, the US secretary of state, said on Monday she hoped the building plan would not "cloud" peace talks.
Palestinians have also accused Israel of attempting to sabotage the peace process after a military operation in Gaza killed at least six Palestinians and left 15 wounded.
The incident on Monday was Israel's largest incursion into the Gaza Strip since Hamas seized control of the territory in June.
Israel sought to play down the incident, which saw tanks and bulldozers move more than 2km into the enclave, as a routine operation "against the terror infrastructure" in Gaza.
But Lieutenant-General Gabi Ashkenaz, Israel's army chief, said daily strikes against Palestinian fighters in the Gaza Strip were having an impact but a big military offensive was becoming more likely.
Speaking at a conference in Tel Aviv on security issues, Ashkenaz said though the daily Israeli incursions into Gaza were hurting the Palestinian fighters, the raids would not stop attacks against Israel entirely.
He said: "We are operating in Gaza on a daily basis. Yesterday we returned from a broad operation ... this brings a reduction in the ground threat and the firing of rockets but does not stop it."
"We will come to the point where we will have to carry out the big operation."