By Mohammed Assadi

RAMALLAH, West Bank, June 2 (Reuters) - Palestinian President Mahmoud Abbas said before meeting Israel's prime minister on Monday that settlement expansion, including newly announced building, was the main hurdle to a statehood deal.

Israel disclosed plans on Sunday to construct nearly 900 new homes in areas of the occupied West Bank that the Israeli government considers part of Jerusalem, despite U.S. and Palestinian calls to halt all settlement expansion.

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

Abbas will meet later in the day with Prime Minister Ehud Olmert, who could be forced to step down in a growing corruption scandal. Olmert has denied any wrongdoing but says he will resign if indicted.

Olmert will leave later on Monday for Washington for a three-day visit where he will meet U.S. President George W. Bush.

OLMERT'S TROUBLES

Olmert's political troubles could lead to an early election and the disruption of peace talks launched at a conference hosted by Bush in November.

Israeli officials said Olmert's plight may have spurred his backing of the new tenders for 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 2003 peace "road map" requires a halt to all settlement activity on occupied land where Palestinians seek statehood.

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.

Abbas said of the building announcement: "We believe that these measures will be the biggest hurdle in the path of the peace process."

Olmert has said the United States and the Palestinians have long been aware of Israel's intention to hold on to several large settlement blocs, around Jerusalem and elsewhere in the West Bank, in any final peace agreement. (Reporting by Mohammed Assadi and Adam Entous; Writing by Adam Entous; Editing by Peter Millership)

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