Peace talks between Israel and the Palestinians are moving ahead despite a dispute over Jewish settlements. But as Robert Berger reports from Jerusalem, deadly violence in the West Bank is overshadowing peace efforts.

Israeli Prime Minister Ehud Olmert (R) shakes hands with Palestinian President Mahmoud Abbas during a meeting in Jerusalem, 27 Dec 2007

Israeli and Palestinian leaders are downplaying a dispute over Jewish settlement construction and have decided to begin negotiations on the so-called "final status" issues. These include Jerusalem, Palestinian refugees and final borders of a Palestinian state.

"We attach great importance to our discussions with the Palestinians and hopefully in the coming year we'll have real progress," said Israeli spokesman Mark Regev.

The Palestinians were furious over Israeli plans to build more than 300 new homes in the Jewish neighborhood of Har Homa in disputed East Jerusalem, land the Palestinians claim for a future state. But facing a self-imposed deadline of reaching a final peace agreement in just a year, the Palestinians decided it is in their interest to press on with the talks.

"The Palestinian people want to see a hope, want to see that at the end of the tunnel there is some light," said Palestinian negotiator Yasser Abed Rabbo.

But progress on the diplomatic front is being threatened by two new incidents of deadly violence in the West Bank. Palestinian militants shot and killed two young Jewish settlers who were hiking in the hills near the biblical town of Hebron. The radical Islamic Jihad group, which opposes peace talks, claimed responsibility for the attack.

Palestinian security force officers carry the body of Mou'tassem al-Sharif during his funeral in Ramallah, 28 Dec 2007

Earlier, Israeli troops raided the West Bank town of Ramallah, and killed a bodyguard of chief Palestinian negotiator Ahmed Qureia. The army said the guard was involved in weapons transfers to Palestinian terrorists.

Israeli opposition leaders said both incidents show that internationally-backed Palestinian President Mahmoud Abbas has no control over the West Bank. Therefore, they said, peace talks with him are a waste of time.