JERUSALEM — Prime Minister Ehud Olmert on Sunday ruled out cease-fire talks with the Gaza Strip's Islamic Hamas rulers, vowing to press ahead with a "true war" against Palestinian militants who attack southern Israeli communities with rocket and mortar fire.

Meanwhile, a Cabinet minister confirmed that Israel has yet another plan to build hundreds of apartments in disputed east Jerusalem and the West Bank — touching off a new crisis in fledgling peace talks between Israel and the moderate, West Bank-based government of Palestinian President Mahmoud Abbas.

The Israeli military has struck hard in recent weeks against Hamas and other armed groups in Gaza. With troops appearing to make substantial gains, Olmert told his Cabinet there were no plans to slow down.

"Operations against terrorists will continue as they have been conducted for many months," Olmert said. "There is no other way to describe what is happening in the Gaza Strip except as a true war between the Israeli army and terror groups."

He said Israel would continue to allow humanitarian aid into Gaza to protect the area's civilians.

Israel sealed its borders with Gaza immediately after Hamas violently wrested control of the territory in June. Israel, which considers Hamas a terrorist group, has cut off most trade and reduced fuel shipments to the area.

Under heavy pressure from Israel's military gains and the economic embargo, Hamas has signaled readiness in recent days for a cease-fire. Several Israeli Cabinet ministers have said the government should consider the offer.

But Olmert told his Cabinet there would be no cease-fire until Hamas renounced violence and recognized Israel's right to exist — conditions set by the "Quartet" of international peace makers. "This policy will not change," he said.

The "Quartet" consists of the U.S., the European Union, the United Nations and Russia.

In Gaza, Islamic Jihad, the small militant group responsible for most of the rocket fire, said there could not be a cease-fire until Israel "pays for its crimes."

Three rockets were fired at southern Israel on Sunday. No injuries or damage were reported.

Israeli Cabinet ministers, meanwhile, allocated more than $200 million over the next five years for a missile defense system, known as Iron Dome, being developed by the Israeli Defense Ministry and Waltham, Mass.-based Raytheon Co.

Israeli Defense Minister Ehud Barak, who has said Israel couldn't conduct a major withdrawal from the West Bank before such a system is in place, called it a "national emergency project." The system, which would fire ground-based missiles at incoming rockets, is believed to be several years away from operation.

Amid the backdrop of Hamas truce overtures, Barak will travel to Egypt on Wednesday to meet with Egyptian President Hosni Mubarak, Israeli security officials said.

Egypt frequently acts as a mediator between Israel and Hamas. It was unclear whether a possible truce would be on the agenda.

Israel's diplomatic efforts to reach a peace deal with Abbas were hurt Sunday with the disclosure that Israel plans to build an additional 740 apartments in disputed east Jerusalem and the West Bank in 2008.

Palestinians claim east Jerusalem and the West Bank, areas captured by Israel in the 1967 Mideast war, as part of their future state.

Some 450,000 Israelis live in these areas, and the timing of Sunday's announcement was sensitive. The two sides formally renewed peace talks after a seven-year break less than one month ago, and President Bush is expected to visit the region next month.

Rafi Eitan, Israel's minister for Jerusalem Affairs, confirmed the Construction Ministry's proposed budget for 2008 includes 500 new apartments for the Har Homa neighborhood in east Jerusalem, and 240 new apartments in Maaleh Adumim, a major West Bank settlement just outside Jerusalem.

Eitan told Army Radio that Israel never promised to halt construction within the municipal borders of Jerusalem, whose eastern sector Israel annexed after capturing in the 1967 Mideast war. Eitan called both areas "integral" parts of Jerusalem.

Olmert spokesman Mark Regev said he was "not aware" of the plan to expand Har Homa and said there was "no new decision" for additional construction in Maaleh Adumim.

The international community never recognized Israeli sovereignty over east Jerusalem. But the area, along with major West Bank settlement blocs, including Maaleh Adumim, are expected to remain in Israeli hands under a final peace settlement.

Under the recently revived "road map" peace plan, Israel committed to freeze all settlement construction. It insists that construction in east Jerusalem and existing settlements is not covered by the peace plan.

Eitan's comments were the third announcement in recent weeks of plans to build in east Jerusalem and the West Bank.

Abbas alleged that the construction projects undermined new peace efforts.

"The negotiations are facing obstacles," Abbas told members of his Fatah Party. "We can't understand these settlement activities at a time we're talking about final-status negotiations."