Israel's government has granted the go-ahead for construction of 1,100 new housing units in illegally occupied east Jerusalem, raising already heightened tensions fuelled by last week's Palestinian move to seek full UN membership.

Israel's interior ministry said on Tuesday that the homes would be built in Gilo, a Jewish enclave in southeast Jerusalem. It said construction could begin after a mandatory 60-day period for public comment, a process that is largely a formality.

The Palestinians claim east Jerusalem as their future capital. They have demanded that Israel halt all settlement construction in east Jerusalem and the adjacent occupied West Bank - territories captured and illegally occupied by Israel since1967 - as a condition for resuming peace talks.

Israel says all of Jerusalem, home to Jewish, Muslim and Christian holy sites, is part of its capital and will not be divided.

Saeb Erekat, the chief Palestinian negotiator, swiftly condemned the Israeli decision, saying it amounted to "1,100 no's to the resumption of peace talks."

He urged the United States, Israel's closest and most important ally, to change its position and support the Palestinians in their quest for UN membership.

With peace talks stalled for the past three years, the Palestinians last week asked the UN to recognise an independent Palestinian state in the West Bank, east Jerusalem and Gaza Strip.

The US opposes the measure and has vowed to veto the request in the Security Council. Like Israel, the US says a Palestinian state can only be established through negotiations.

In an interview published Tuesday, Israeli Prime Minister Binyamin Netanyahu said he would not freeze settlement construction again.

Speaking to the Jerusalem Post, he said that a 10-month moratorium on new construction last year failed to yield results. He said he saw no need for another freeze.

Netanyahu says negotiations should begin without any preconditions.

'Counterproductive'

The European Union's chief diplomat on Tuesday lamented Israel's green-light to expand the Gilo settlement and urged the government to reverse its decision.

"It is with deep regret that I learned today about the decision to advance in the plans for settlement expansion in east Jerusalem, with new housing units in Gilo," said Catherine Ashton, EU foreign policy chief.

"This plan should be reversed. Settlement activity threatens the viability of an agreed two-state solution and runs contrary to the Israeli-stated commitment to resume negotiations," Ashton told the European parliament.

She recalled that the Quartet of Middle East peacemakers - the EU, Russia, the UN and the US - have pleaded with Israelis and Palestinians to "refrain from provocative actions" if talks are to resume.

Richard Miron, spokesman for UN Mideast envoy Robert Serry, said the Israeli decision was "very concerning'' and ignored the Quartet's appeal.

"This sends the wrong signal at this sensitive time,'' he said.

Meanwhile, Hillary Clinton, US secretary of state, called Israel's decision to expand its settlement "counterproductive".