Israeli Defense Minister Ehud Barak said Wednesday that Israel is ready to cede Arab areas in eastern Jerusalem to a future Palestinian state, Xinhua reported.
Barak's statement comes ahead of Thursday's direct peace talks in Washington between Israeli Prime Minister Benjamin Netanyahu and Palestinian National Authority (PNA) President Mahmoud Abbas.
Any deal would include what Barak called a "special regime" for managing what is known as the "sacred basin," containing many of the sites holy to Israelis, Palestinians and the Christian world, reported local daily Ha'aretz.
"West Jerusalem and 12 Jewish neighborhoods that are home to 200,000 residents will be ours. The Arab neighborhoods in which close to a quarter million Palestinians live will be theirs," Barak was quoted by the newspaper as saying.
Netanyahu, however, has repeatedly emphasized that dividing Jerusalem, which Israel holds as it's eternal capital, was not up for discussion in any deal with Abbas.
Barak said the killing of four Israelis by Palestinian gunmen in the West Bank Tuesday evening should not stop the talks, set to begin with a meeting between the two leaders with U.S. President Barack Obama.
"This is a very grave incident," Barak said of the attack, which has enraged Israelis.
"Israel will not allow terrorists to lift their heads and will exact a price from the murderers and those who sent them. This is likely an attempt by terrorist lowlifes to stymie the diplomatic process and to hurt the chances of the talks opening in Washington, " Barak said.
Barak calls on settlers to be restrained and not take the law into their hands, and said the army would spare no effort in tracking down the killers.
A settler leader told Israeli Army Radio Wednesday morning that construction in "every town and village" of the West Bank would resume at local time 6 p.m. (1600 GMT) despite the ongoing freeze of settlement building.