Israel announced last week it would build 1,300 new housing units in occupied east Jerusalem, which the Palestinians want as part of a future capital.
 
A 2003 "road map" peace plan, reaffirmed by Israeli and Palestinian leaders at a conference hosted by George Bush, the US president, in November, requires a halt to all settlement activity on occupied land that the Palestinians want in a future state.
 
Efforts to reach an agreement have been undercut over disputes on settlements as well as a corruption scandal that could force Ehud Olmert, the Israeli prime minister, out of office.
 
On Saturday, Rice faulted Israel for settlement building and for not easing more restrictions on Palestinians in the West Bank.
 
'Policy to destroy'
 
"Look, it's a problem and I think it's a problem that we're going to address with the Israelis," Rice said of Israel's newly-announced housing units.
 
"We've said before that this is a time to try and build confidence and this is simply not helpful," she said.
 
Saeb Erekat, a Palestinian negotiator, called the Israeli announcement part of "a systematic policy to destroy the peace process."
 
The Israeli interior ministry said the new units, planned for the ultra-Orthodox area of Ramat Shlomo, were approved by the regional planning board as part of Jerusalem's master plan.
 
David Chater, Al Jazeera's correspondent in Jerusalem, said: "Condoleezza Rice saying that continued expansion is a problem is something of a bland understatement."
 
Rice's comments, he said, will have "no more effect this time round than it has every single time since she's been here." 
 
"Its always been a problem, the settlements have been expanding all the time. They actually picked up pace.
 
"Israel is ignoring what the Americans are saying. The Israelis are going ahead."
 
Olmert has vowed to retain major settlement blocks in any deal.
 
After seeing Livni, Rice plans to meet Palestinian leaders in the West Bank city of Ramallah.