WASHINGTON (AFP) –
In one of its sharpest rebukes to date, the Obama administration Tuesday voiced dismay at a decision to build new settler homes in Jerusalem, warning Israel it will hamper moves to kickstart peace talks.

"We are dismayed at the Jerusalem planning committee's decision to move forward on the approval process for the expansion of Gilo in Jerusalem," President Barack Obama's spokesman Robert Gibbs said in a statement.

"At a time when we are working to re-launch negotiations, these actions make it more difficult for our efforts to succeed," Gibbs said.

Israel earlier approved the construction of hundreds of new housing units in annexed Arab east Jerusalem, drawing Western criticism as it drove another stake into troubled Middle East peace efforts.

The interior ministry said it approved the construction of 900 new units in Gilo, one of a dozen Jewish settlements in east Jerusalem.

The move flies in the face of Palestinian calls for a complete freeze on new building ahead of fresh peace talks, a demand that has had the backing of the United States.

"Neither party should engage in efforts or take actions that could unilaterally pre-empt, or appear to pre-empt, negotiations," Gibbs warned.

"Our position is clear: the status of Jerusalem is a permanent status issue that must be resolved through negotiations between the parties."

The State Department also added its opposition, telling Israel that Washington opposed the move.

"We object to this and we object to other Israeli practices in Jerusalem related to housing, including the continuing pattern of evictions and demolition of Palestinian homes," said spokesman Ian Kelly.

A senior US official, who asked to remain anonymous, said later that US envoy to the Middle East George Mitchell had been told about the imminent decision by the Jerusalem planning committee in talks with Israeli officials in London on Monday.

He had informed them of US concern over the project.

"This kind of unilateral actions are exactly the kind of action that we think both sides should refrain from," added the State Department's Kelly.

"We understand the Israeli point of view about Jerusalem but we think all sides right now (...) should refrain from these actions," he added.

"We're calling on both parties to refrain from action and from rhetoric that would impede this process. It's a challenging time and we need to focus on what's important."

Israeli news reports said hawkish Prime Minister Benjamin Netanyahu had rejected a request from his US ally to halt the construction in Gilo.

The Palestinians have demanded that Israel freeze all settlement construction in the occupied West Bank, including annexed east Jerusalem, before any resumption of talks, but Israel has so far offered only a limited reduction in new building.