(Recasts with Palestinian reaction, details)

By Adam Entous

JERUSALEM, June 2 (Reuters) - Palestinian President Mahmoud Abbas protested Jewish settlement growth near Jerusalem in talks on Monday with Israeli Prime Minister Ehud Olmert, who sought to show it was business-as-usual despite a corruption probe.

"Differences were deep and strong in this area," Abbas aide Saeb Erekat said of the settlement issue, which has dogged U.S.-sponsored peace talks since they were launched in November.

Abbas's prime minister, Salam Fayyad, stepped up the pressure, calling on the Organisation for Economic Cooperation and Development (OECD) in a letter to deny Israel membership over building on occupied land, a Palestinian official said.

Olmert's spokesman, Mark Regev, said Fayyad's lobbying efforts with the OECD were "simply unproductive" and that the prime minister raised the issue during his two-hour meeting with Abbas in Jerusalem. Olmert will fly later on Monday to Washington, where he will meet President George W. Bush.

Olmert has so far rebuffed calls that he leave office over allegations he took envelopes stuffed with cash from a Jewish-American businessman. Olmert and the businessman have denied wrongdoing.

Officials said Olmert's strategy was to push ahead with the negotiations with the Palestinians, as well as indirect talks with Syria, as if nothing has changed in hope the police investigation does not end in charges against him.

"This process will continue," Regev said of the talks with the Palestinians, adding that Olmert recommitted himself during the meeting to trying to reach a deal on Palestinian statehood by the end of the year.

"We're hopeful, still, that it will be possible to reach such an agreement," Regev said. "I can say unequivocally that there was progress reached in this meeting today."

He gave no details.

The political crisis enveloping Olmert could trigger an early election and derail the peace talks, Israeli, Palestinian and Western officials say. Olmert says he will resign if indicted.

SETTLEMENTS

On the eve of the Olmert-Abbas meeting, Israel announced plans to build nearly 900 homes in areas of the occupied West Bank that the Israeli government considers part of Jerusalem, despite U.S. and Palestinian calls to stop settlement expansion.

"If Israel does not halt these activities, it will be difficult to reach the political settlement," Abbas said at a news conference earlier in the day with visiting German Foreign Minister Frank-Walter Steinmeier.

Erekat urged Washington to step up pressure on Israel to stop the building.

Israeli officials said Olmert's plight may have spurred his backing of the new tenders, which include an additional 763 housing units in Pisgat Zeev and 121 housing units in Har Homa, an area Palestinians refer to as Jabal Abu Ghneim.

The new building could help Olmert shore up support from the ultra-Orthodox Shas party, a key member of his coalition government opposed to major concessions to the Palestinians on Jerusalem, the officials said.

The 2003 peace "road map" requires a halt to all settlement activity on occupied land where Palestinians seek statehood.

White House spokeswoman Dana Perino said there were tensions on both sides, citing the settlement issue as well as concerns that the Palestinians were not moving fast enough on their security obligations under the road map.

"So it's a two-way street," she said.

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