* Settlement plans come ahead of first prisoner release
* Peace talks resumed on July 30 after three years
* Palestinians condemn new housing but negotiations on track (Updates to show convening of cabinet forum on prisoner releases)
By Jeffrey Heller
JERUSALEM, Aug 11 (Reuters) - Israel moved forward on Sunday with plans to build nearly 1,200 homes for Jewish settlers, holding fast to a defiant settlement policy as cabinet ministers met to approve a release of Palestinian prisoners ahead of a new round of peace talks.
Israel has made a push on settlements since the resumption on July 30 of U.S.-brokered talks on Palestinian statehood, signalling its intention to continue to build in major enclaves it wants to keep in any future peace deal.
While condemning settlement expansion, Palestinians have stopped short of threatening outright to abandon the negotiations, which are due to go into a second round in Jerusalem on Wednesday after a session in Washington.
Israeli media, in unconfirmed reports, have suggested Sunday's housing plans were disclosed to Washington in advance and were aimed partly at overcoming opposition within the pro-settlement cabinet to prisoner releases designed to spur negotiations halted three years ago.
The Housing Ministry said on its website that tenders were issued for building 793 new apartments in areas of the West Bank that Israel annexed after capturing the territory and the eastern part of Jerusalem in the 1967 Middle East war.
Plots for the construction of 394 more units were being sold in Ariel, Efrat, Maale Adumim and Betar, settlements in areas Israel has said it aims to retain in any land-for-peace accord.
"We shall continue with construction, everywhere," Housing Minister Uri Ariel of the far-right Jewish Home party said at the formal relaunch of an Israeli housing project in East Jerusalem on Sunday.
Ariel said his party would vote against the release of Palestinian prisoners, saying he was "against freeing terrorists. It goes against our security interests".
Israeli Finance Minister Yair Lapid, whose centrist party is right-wing Prime Minister Benjamin Netanyahu's biggest partner in the governing coalition, called the decision to issue the settlement housing tenders "unhelpful to the peace process".
Mark Regev, an Israeli government spokesman, dismissed the criticism saying:
"The construction decided upon today in Jerusalem and in the settlement blocs are in areas that will remain part of Israel in any possible future peace agreement. This in no way changes the final map of peace. It changes nothing."
Israeli cabinet ministers met late on Sunday to finalise a list of 26 Palestinian prisoners expected to be released on Tuesday or Wednesday, out of a total of 104 whose release was approved in principle last month to help restart the talks.
Families of Israelis killed in Palestinian attacks appealed against the move, as many of those going free were convicted of involvement in lethal attacks. The High Court usually opts not to intervene.
Palestinian President Mahmoud Abbas had demanded the release of prisoners held since before a 1993 interim peace accord took effect. Israel has jailed thousands more Palestinians since then, many for carrying out deadly attacks.
Drawing Palestinian anger, Israel's military-run Civil Administration in the West Bank gave preliminary approval on Thursday for the construction of more than 800 new settler homes - some of them in isolated settlements - but said it needed government approval before building could begin.
Most world powers regard all the settlements as illegal and Palestinians say the enclaves could deny them a viable and contiguous state.
"The international community must stand with this peace process and must stand shoulder to shoulder with us and hold Israel accountable for its continuing settlement activities," Palestinian chief negotiator Saeb Erekat told Reuters.
Some 500,000 Israeli settlers live in the West Bank and East Jerusalem amid 2.5 million Palestinians. Israel withdrew in 2005 from the Gaza Strip, which is now governed by Hamas Islamists opposed to permanent co-existence with the Jewish state. (Editing by Andrew Roche and Robin Pomeroy)