By Mona Salem

SIRTE, Mar 25, 2010 (AFP) - Arab foreign ministers on Thursday agreed to raise funds for Jerusalem Palestinians in a bid to counter Israel's settlement drive in the Holy City, at preparatory talks for a weekend summit.

Their decision will be submitted to Arab leaders for final ratification when they gather on Saturday and Sunday in the Libyan Mediterranean city of Sirte for their annual conference.

"Yes, they have agreed," Arab League chief Mussa told reporters when asked if the fund had been approved by the ministers.

The Palestinian Authority had asked for 500 million dollars (376 million euros) in Arab aid to help Jerusalem Palestinians cope as they are squeezed out by Israel's settlement drive.

The weekend summit is set to be dominated by the Middle East peace process after Israel infuriated Palestinian and Arab leaders by announcing earlier this month plans to build 1,600 new homes for Jewish settlers in east Jerusalem.

"We have asked for half a billion dollars," Palestinian foreign minister Riyad al-Malki told AFP earlier on Thursday.

"It is a modest amount compared to what Israel and the Jewish communities around the world spend on settlements in east Jerusalem and which amounts so far to more than 17.4 billion dollars," Malki added.

A senior Palestinian official said the money would go towards improving infrastructure in mostly Arab east Jerusalem, building hospitals, schools, water wells and providing financial support to those whose homes have been demolished by the Israelis.

"We are not asking for too much or for the impossible, or even for an amount of money which our Arab brothers cannot match," Malki said.

He said the fund was much-needed "support if we really want to bolster the presence of Palestinians in Jerusalem."

Israeli settlement plans have been condemned worldwide.

The United States and its partners in the Middle East diplomatic Quartet -- the European Union, Russia and the United Nations -- last week called for Israel to halt all settlement construction and for a peace deal with the Palestinians by 2012.

The Quartet urged Israel "to freeze all settlement activity... to dismantle outposts erected since March 2001 and to refrain from demolitions and evictions in east Jerusalem."

But Israeli Prime Minister Benjamin Netanyahu warned in Washington on Tuesday that peace efforts would be held up by what he called "unreasonable" demands for a freeze on new settlers' homes in east Jerusalem and the West Bank.

UN chief Ban Ki-moon, who has been invited to the summit, will on Friday meet Arab foreign ministers to brief them on last week's Quartet meeting in Moscow, Mussa said.

The ministers will also discuss US and international efforts to halt Israeli settlement building and what measures could be taken if these efforts fail, he said.

"We can no longer accept the pursuit of settlement construction," Mussa said.

Meanwhile on Thursday Iraqi Foreign Minister Hoshyar Zebari was ready to quit the summit to protest at a meeting between Libyan leader Moamer Kadhafi and Iraqi opposition figures.

Zebari received instructions from Baghdad to pack up and go home, but the dispute was later resolved and he told reporters he would stay and continue to represent Iraq at the gathering.

"There is no more question of the Iraqi delegation pulling out," Zebari said. "We will contribute, we will participate and we will work for the success of this summit."

He declined to elaborate on the spat between Tripoli and Baghdad, but said "there were some negative positions concerning political developments in Iraq."

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Copyright AFP 2010.