By Mohammed Abu Ganeyeh
BETHLEHEM, West Bank (Reuters) - Israeli Prime Minister Benjamin Netanyahu ordered officials on Wednesday to press ahead with plans to build 3,500 more homes for Jewish settlers, hours after Israel freed 26 Palestinian prisoners as part of U.S.-brokered peace efforts.
Netanyahu's step was seen as a way to placate hardliners who criticized him as the inmates, convicted of killing Israelis, basked in a heroes' welcome from hundreds of relatives and well-wishers in the occupied West Bank and the Gaza Strip.
The Israeli leader issued instructions to market 1,500 settler homes and pursue plans for a further 2,000, an official in Netanyahu's office said, speaking on condition of anonymity.
Israel's Interior Ministry announced earlier in the day that the 1,500 units would be built in Ramat Shlomo, a settlement in an area of the occupied West Bank that Israel considers part of Jerusalem.
Those plans were first announced in 2010, clouding a visit to Israel at the time by U.S. Vice President Joe Biden, who condemned the project, which was subsequently shelved.
Israel announced last December it would proceed with the construction, but froze the move again before a visit by U.S. President Barack Obama in March this year.
The other 2,000 settler housing units would be built in other parts of the West Bank, the official said, adding that "Netanyahu had pushed the settlement plans because of the prisoner release." A senior official said those 2,000 units were only in the planning stages at this time.
The Palestinians, who want to establish a state in East Jerusalem, the West Bank and Gaza, territories captured by Israel in a 1967 war, condemned the settlement plans.
"This policy is destructive for the peace process," said Nabil Abu Rdeineh, a spokesman for Abbas.
U.N. Secretary-General Ban Ki-moon praised Israel's release of the prisoners, but condemned the settlement activity as "contrary to international law and constitutes an obstacle to peace," a statement from his office said.
'HEROES COMING HOME'
Hours before the decision to expand settlements, Palestinian inmates boarded buses for home outside Israel's Ofer prison in the West Bank, and dozens of Israelis protested the release.
One held a sign with the photographs of some of the Israelis they killed. "The victims of terror are turning in their graves," one placard read.
"Our heroes are coming home, long live the prisoners," crowds chanted outside the office of Palestinian President Mahmoud Abbas in the West Bank city of Ramallah.
Issa Abed Rabbo, convicted of murdering two Israeli hikers in 1984, was carried through the alleys of the biblical town of Bethlehem on the shoulders of cheering Palestinians as fireworks went off and patriotic songs blared.
"My feeling is that of a commander returning from battle, carrying a banner of victory and freedom," Abed Rabbo said, his outstretched fingers forming a triumphant V.
Jailed before or just after the first Israeli-Palestinian interim peace deals were signed 20 years ago, the prisoners were released as part of a limited amnesty demanded by the Palestinians to revive long-stalled statehood negotiations.
The second prisoner release since peace talks resumed in July after a three-year break opened fissures in Netanyahu's rightist government.
A pro-settler coalition partner, the Jewish Home party, and members of his own Likud, called on the leader to cancel the amnesty.
In all, 104 long-serving Palestinian inmates will be freed in accordance with the U.S.-brokered understandings that paved the way for the revival of peace talks.
(Additional reporting by Lou Charbonneau in New York; Ali Sawafta in Ramallah and Nidal al-Mughrabi in Gaza; Writing by Allyn Fisher-Ilan and Maayan Lubell; Editing by Jeffrey Heller, Andrew Heavens and Peter Cooney)