The EU presidency is "deeply concerned by the decision by the Israeli authorities to approve the construction" of 400 housing units in the Neve Yaakov settlement in east Jerusalem and to invite tenders for a total of 316 housing units in the Beitar Illit settlement in the West Bank and Har Homa, also in east Jerusalem.

Jewish settlements are widely seen as one of the major hurdles in peace negotiations between Israel and the Palestinians that were revived at a US conference in November but have failed to make much tangible progress.

At the conference in Annapolis, Maryland, Israel agreed to freeze settlement activity, but the Israeli government says it maintains the right to build in settlement blocs it wishes to keep in any future peace deal.

The EU presidency said: "The construction of settlements anywhere in the Occupied Palestinian Territories, including east Jerusalem, is illegal under international law."

"This decision serves to undermine the credibility of the ongoing peace process," it added in a statement.

"Settlement activities prejudge the outcome of final status negotiations and compromise the viability of a concerted two-state solution."

The European Union calls on Israeli and Palestinian leaders "to honour their respective undertakings".

The statement also called on Israel "to ensure a complete freeze on settlement activities, including that for 'natural growth', in east Jerusalem as well, and to dismantle the unauthorised outposts built since 2001."

A total of 245,000 Palestinians live in east Jerusalem alongside more than 200,000 Jewish settlers.

© 2008 Agence France-Presse