Israel said Sunday it has approved building hundreds of settler homes after five members of an Israeli family _ including three children _ were knifed to death as they slept in a West Bank settlement over the weekend.

The attack and the government's response threatened to drive Israeli-Palestinian peacemaking even further out of reach. Israel, which blames the attack on Palestinian militants, is liable to set aside an emerging peace initiative it planned to propose, while the planned construction of new settler homes deepened Palestinian mistrust.

Even in a country long accustomed to deadly violence, the stabbings in the settlement of Itamar stunned the nation. Pictures of the victims, including a 4-year-old boy and his infant sister, were splashed across the front pages of major newspapers.

Thousands thronged a Jerusalem cemetery for the funeral, including Israel's chief rabbi and senior politicians. People screamed and wailed in the background as speakers addressed the audience, and family members collapsed in grief.

"There is not a Jewish heart that is not shedding a tear," said Chief Rabbi Yona Metzger, his voice cracking in anguish. "After such horrific pictures, with whom do we have to sit and talk peace with?"

Other speakers also delved into politics, criticizing the government for slowing West Bank settlement construction and saying it had ignored Israelis' safety.

The new construction, approved Saturday night by a team of Cabinet ministers, would take place in major West Bank settlement blocs that Israel expects to hold on to in any final peace deal, the prime minister's office said. Prime Minister Benjamin Netanyahu, who is under domestic pressure to respond harshly to the killings, is a member of that team.

Between 300 and 500 apartments and homes were approved for construction, officials said.

Palestinian opposition to settlement construction on lands they want for a future state has brought negotiations to a virtual standstill over the past two years. The Palestinians refused to negotiate with Israel as long as it persists.

"We condemn this act of accelerated settlement construction," senior Palestinian official Saeb Erekat said. "We urge the international community to intervene and implement the two-state solution. This is the only way out of this vicious circle of violence and counter-violence."

Settler leader Dani Dayan called the government's move "a very small step in the right direction."

The region's U.N. mission expressed concern over the new construction. "Settlement activity is illegal and such a decision is not conducive to efforts to resume negotiations and achieve a negotiated Israeli-Palestinian peace," said a spokesman, Richard Miron.

Although ground has been broken on as many as 500 apartments and homes since an Israeli moratorium on new West Bank settlement construction expired in late September, the government is holding up approvals on hundreds of other homes, to the settlers' dismay.

The attack Friday night in Itamar, home to some of Israel's most radical settlers, was the deadliest against Israelis in years, and security forces were on alert Sunday for possible settler retaliation against Palestinians.

The military said suspects were taken into custody in connection with the killings but would give no details. Troops were searching the area around the settlement assailants, the military said.

The Al Aqsa Martyrs' Brigades, a mostly defunct Palestinian militant group, took responsibility for the killings. It was not clear if the group really was responsible, because it frequently takes credit for attacks it didn't commit in a bid to raise its profile.

Palestinian President Mahmoud Abbas condemned the killings, and Palestinian security forces were also searching for the perpetrators, Palestinian officials said.

But in Gaza, ruled by Islamic Hamas militants, officials applauded the attack and residents celebrated the killings.

At the start of Sunday's weekly Israeli Cabinet meeting, Netanyahu said Abbas' condemnation wasn't strong enough, and that he told the Palestinians leader that his government must make "unequivocal efforts to stop allowing incitement" against Israelis.

Defense Minister Ehud Barak vowed that "the iron fist" of Israeli security forces would "soon land on the murderers."

Developments on the diplomatic front could depend in part on whether the violence spreads.

U.S.-backed peace talks between the two sides collapsed last year amid disputes over continued Israeli construction in the West Bank and east Jerusalem, territory Palestinians envision as part of their future state.

Netanyahu had been expected to deliver a major policy speech soon, possibly proposing a Palestinian state within temporary borders as a way out of a long-standing negotiations impasse. fearing the temporary arrangement would become permanent.

Palestinians are pushing for world recognition of an independent state with or without a deal. Although that would not deliver them an actual state, it could isolate Israel.

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Associated Press writer Josh Lederman contributed to this report.