Israel's prime minister has ordered the building of 2,000 new housing units for Israelis, mainly in East Jerusalem, an area Palestinians claim as the capital of their future state.

Binyamin Netanyahu said in a statement on Tuesday that the new construction includes settlements that he believes would be part of Israel in a future peace accord. Israeli settlements built on occupied Palestinian land are considered illegal under international law.

Israel also decided on Tuesday to freeze the transfer of tax revenues owed to the Palestinian Authority, as a punitive measure after Palestine was granted full membership in UNESCO, media reports said.

The decision was taken at a meeting of the Forum of Eight senior ministers, chaired by Netanyahu, Israel's public radio said.

An Israeli official said the accelerated construction is an answer to the moves being made by the Palestinian Liberation Organisation in pursuit of statehood recognition.

He was speaking on condition of anonymity due to the sensitivity of the issue.

"You can't demand from the Israeli public to continue to show restraint when the Palestinian leadership continues to slam the door in their face," said the official.

He also said 1,650 of the new tenders are for units in eastern parts of Jerusalem, and the rest are for Efrat and Maale
Adumim, two illegal settlements in the occupied West Bank.

Palestinians object to Jewish housing in East Jerusalem and demand an end to all construction in the settlements before peace talks can resume. Israel rejects that as a precondition.