JERUSALEM, Dec 23 (Reuters) - Israel plans to build about 740 new homes next year on occupied land near Jerusalem, the construction ministry said on Sunday, despite Palestinian calls for a total settlement freeze.

The issue of Israeli settlement building in the Jerusalem area has clouded negotiations between Israel and the Palestinians launched at a peace conference last month in Annapolis, Maryland.

The first round of talks following Annapolis opened in discord earlier this month after Palestinians demanded Israel drop plans to build some 300 new homes in an area near Jerusalem known to Israelis as Har Homa and to Palestinians as Abu Ghneim.

The 740 new homes are included in the construction ministry's budget for 2008, officials at the ministry said.

The new homes include 500 at Har Homa and 240 at the Maale Adumim settlement near Jerusalem. Israel hopes to keep Maale Adumim and other large settlement blocs in any final peace deal.

Israel annexed Arab East Jerusalem during a 1967 Middle East War, a move not recognised internationally.

Israeli officials defended the new construction plans, which the Palestinians say jeopardise negotiations set to resume on Monday.

"Har Homa is an integral part of Jerusalem and Israel will not stop building there," said Minister of Jerusalem Affairs Rafi Eitan on Army Radio. "It is Israel's duty to provide its citizens with a place to live".

A 2003 "road map" peace plan calls for Israel to halt all settlement activity, including so-called natural growth, and for the Palestinians to rein in militants.

Israeli officials said they would allow construction within built up areas of existing settlements.

Chief Palestinian negotiator Ahmed Qurei said on Friday the Jewish state must halt all settlement building before final status talks can continue in earnest. (Writing by Ari Rabinovitch; editing by Philippa Fletcher)

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