Activity dropped by 9.6 percent in the Northeast and 15.5 percent in the South, two regions hit by snowstorms in February. Building rose by 10.6 percent in the Midwest and 7.9 percent in the West.

Building permits, considered a good barometer of future activity, fell 1.6 percent to an annual rate of 612,000 units after having fallen a larger 4.7 percent in January.

Paul Dales, an economist at Capital Economics, said the February weakness stemmed from severe winter weather which prevented builders from breaking ground on new projects. But he said the housing outlook remains bleak because of a huge glut of unsold homes, reflecting the weakness in sales and the continued crisis with home foreclosures.

He said that in addition to 3.8 million homes for sale currently, foreclosures could dump another 5 million to 6 million homes on the market.

“Some of this excess may be reduced by a surge in sales ahead of the end of the tax credit, but the bulk is going to take a very long time to work off,” Dales said in a research note.

To qualify for a government tax credit, buyers must sign the purchase contract by the end of April.

Housing set records in sales and construction during the boom years but more recently has undergone a painful bust, a downturn which helped push the overall economy into the worst recession since the 1930s.

The National Association of Home Builders reported Monday that its survey of builder sentiment dropped by two points to 15 in March, underscoring the gloom in the housing market.

Builders said that harsh winter weather and the competition from deeply discounted foreclosures were dampening sales prospects. They said they were seeing fewer prospective buyers and were feeling less optimistic about the likelihood of sales over the next six months, according to the latest survey.

Sales of new homes plunged 11 percent to a record low in January, the third consecutive monthly decline. Sales of previously occupied homes were down 7 percent, the sharpest drop since last June.

Demands become clear
After a weekend of rare broadsides from top U.S. officials, including Secretary of State Hillary Rodham Clinton, American demands became clear Monday. The U.S. wants Israel to cancel the construction plan, U.S. and Israeli officials said, speaking on condition of anonymity because no announcement was made.

American officials said they were also insisting that Israel take significant steps to get peace talks back on track. These might include releasing Palestinian prisoners or turning over additional West Bank land to Palestinian control.

Washington, the officials added, also has demanded that Israel officially declare that talks with the Palestinians will deal with all the conflict’s big issues, including final borders, the status of Jerusalem and the fate of Palestinian refugees who lost their homes during the war that followed Israel’s 1948 creation.

But Netanyahu appeared unreceptive to the main demand, defending four decades of construction for Israelis in east Jerusalem.

“The building of those Jewish neighborhoods in no way hurt the Arabs of east Jerusalem and did not come at their expense,” he told his parliament on Monday.

Netanyahu has apologized for the timing of the project’s approval but has not said he will cancel it.

City will not change its policies
Palestinians say Jewish building in east Jerusalem, an area they hope to make their capital, eats up land they want for a future state, cuts off east Jerusalem from the rest of the West Bank and prevents the expansion of Arab neighborhoods. The Palestinians also point out that much of the land used for Jewish construction was expropriated from Arab owners.

Stephan Miller, a Jerusalem spokesman, said the city will not change its policies ? meaning Jewish construction in the part of the city Palestinians claim will continue. “We are developing the entire city for the benefit of all residents,” he said.

Most Israelis accept the Jewish neighborhoods in east Jerusalem as part of Israel, differentiating them from West Bank settlements, which many Israelis oppose. But since the world does not recognize Israel’s annexation of east Jerusalem, the international legal status of the neighborhoods is the same as the settlements, which are considered illegal.

The unusually harsh U.S. criticism has undercut Netanyahu’s efforts to play down the crisis. Israeli newspapers reported Monday that Israel’s ambassador to Washington, Michael Oren, told Israeli diplomats in a conference call Saturday night that their country’s relations with the U.S. haven’t been this tense in decades.

?Attempt to suffocate the Palestinians
Israel does not stand to benefit from antagonizing its most important ally, but Netanyahu has historically taken a hard line against territorial concessions to the Palestinians. A curb on east Jerusalem construction also could fracture his hawkish governing coalition.

Egyptian Foreign Minister Ahmed Aboul Gheit called for international moves against Israel, calling its Jerusalem policy “absurd, an evasion, maneuvering and an attempt to suffocate the Palestinians.”

Jerusalem is the most explosive issue in the Israel-Palestinian conflict. Israel captured east Jerusalem in the 1967 Mideast war and annexed it, claiming the whole city as its capital. No other country has recognized the annexation.

At the emotional and religious center of the dispute is Jerusalem’s Old City, with shrines holy to Jews, Christians and Muslims.

For a fourth straight day, Israel deployed hundreds of police around the area and restricted Palestinian access in anticipation of possible unrest. Israel also maintained a closure that barred virtually all West Bank Palestinians from entering Israel.

In the West Bank, Israeli troops dispersed 70 Palestinians hurling rocks and burning tires north of Jerusalem, the military said, wounding at least four people. In Egypt, meanwhile, thousands of students at six universities protested against Israel, shouting, “Arm us and send us to Al-Aqsa,” Islam’s third holiest site, also located in the Old City.

Today, about 180,000 Israelis live in east Jerusalem, in addition to nearly 300,000 Jewish settlers in the West Bank. Israel withdrew its 8,000 settlers from Gaza five years ago, though it continues to control that territory’s borders, airspace and sea coast. Palestinians hope to establish a state in the West Bank, Gaza and east Jerusalem.

The time capsule did contain letters from Somerton residents, photographs, a VHS tape and a 1981 Time magazine with a picture of President Ronald Reagan on the cover.

Few details about Baradars arrest
Talking with the Taliban is gaining traction in Afghanistan as thousands of U.S. and NATO reinforcements are streaming in to reverse the Taliban’s momentum. That has prompted Pakistan and others to stake out their positions on possible reconciliation negotiations that could mean an endgame to the eight-year war.

Officials have disclosed little about how Baradar was nabbed last month in the port city of Karachi. The Pakistanis were said to be upset that the Americans were the source of news reports about his arrest.

The capture was part of a U.S.-backed crackdown in which the Pakistanis also arrested several other Afghan Taliban figures along the porous border between the two countries, after years of being accused by Washington of doing little to stop them.

Far from expressing gratitude, members of Karzai’s administration were quick to accuse Pakistan of picking up Baradar either to sabotage or gain control of talks with the Taliban leaders.

Whatever the reason, the delicate dance among Karzai, his neighbors and international partners put the debate over reconciliation on fast forward.

Top United Nations and British officials emphasized last week that the time to talk to the Taliban is now. The Afghan government, for its part, has plans to offer economic incentives to coax low- and midlevel fighters off the battlefield. Another driving force is President Barack Obama’s goal of starting to withdraw U.S. troops in July 2011.

The United States, with nearly 950 lives lost and billions of dollars spent in the war, is moving with caution on reconciliation.

At odds over who should be at table
At a breakfast meeting in Islamabad last week, Karzai said he and his Western allies were at odds over who should be at the negotiating table. Karzai said the United States was expressing reservations about talks with the top echelon of the Taliban while the British were “pushing for an acceleration” in the negotiation process.

“Our allies are not always talking the same language,” he said.

Karzai said overtures to the Taliban stood little chance of success without the support of the United States and its international partners. He says his previous attempts to negotiate with insurgents were not fruitful because “sections of the international community undermined ? not backed ? our efforts.”

The U.S. has said generally that it supports efforts to welcome back any militants who renounce violence, cut ties with al-Qaida and recognize and respect the Afghan constitution, but it is keeping details of its position closely held.

Daniel Markey with the Council on Foreign Relations said that while Karzai is having discussions with senior people on the Taliban side, “it’s not clear that Washington or other members of the international community have weighed in as to what they believe are the red lines or proper boundaries with respect to negotiations with the Taliban.”

During his trip to Afghanistan last week, Defense Secretary Robert Gates said it was premature to expect senior members of the Taliban to reconcile with the government. He said until the insurgents believe they can’t win the war, they won’t come to the table. Secretary of State Hillary Rodham Clinton has said she’s highly skeptical that Taliban leaders will be willing to renounce violence.

Timing of outreach still under debate
A U.S. military official in Kabul, who spoke on condition of anonymity to discuss reconciliation, said the top commander in Afghanistan, U.S. Gen. Stanley McChrystal, has not yet solidified his opinion on this issue.

He said the U.S. is still debating the timing of the Afghan government’s outreach to senior leaders of three main Afghan insurgent groups ? Omar; Jalaluddin Haqqani, who runs an al-Qaida-linked organization; and Gulbuddin Hekmatyar, the boss of the powerful Hezb-e-Islami.

The official added that the international military coalition had no problem with the Afghan government’s reaching out to anyone, at any time, but is concerned that a deal to end the violence not come at too high a price.

Deep differences remain within the Obama administration on reconciliation, said Lisa Curtis, a research fellow on South Asia for the Heritage Institute, a right-leaning think tank in Washington. “This disagreement is contributing to a lack of clarity in U.S. official statements on the issue and leading to confusion among our allies,” she said.

“The military surge should be given time to bear fruit,” Curtis argued. “Insurgents are more likely to negotiate if they fear defeat on the battlefield.”