French Foreign Minister Bernard Kouchner on Wednesday said an Israeli decision to build hundreds of homes in East Jerusalem was not an obstacle to peace talks, despite international condemnation of the plan.

In Jaffa, speaking to reporters at the home of the French ambassador to Israel, Kouchner said he had understood from Prime Minister Netanyahu that the move was only in the stages of planning, which he accepted.

The French foreign minister met with opposition leader Tzipi Livni earlier in the day. He told her that, "The coming days are a test for the Israeli government."

Meanwhile, the European Union on Wednesday joined the chorus of international criticism of the Israeli plan to build in East Jerusalem, saying the move hampered talks over the establishment of a Palestinian state.

"The Presidency recalls that settlement activities, house demolitions and evictions in East Jerusalem are illegal under international law," the Swedish Presidency of the EU said in a statement.

"Such activities also prejudge the outcome of final status negotiations and threaten the viability of a two-state solution."

The EU statement echoed language used on Tuesday by the White House, which said it was "dismayed" by the move.

"The Presidency of the European Union is dismayed by the recent decision on the expansion of the settlement of Gilo," said the statement, referring to the Jerusalem neighborhood where Israel decided on Tuesday to build 900 new homes.

The EU presidency added that if there were to be genuine peace, a way must be found to resolve the status of Jerusalem as the future capital of two states.

Obama: Expanding settlements won't make Israel safer

The statement came shortly after U.S. President Barack Obama on Wednesday said the move complicated efforts by his administration to relaunch peace talks and embitters the Palestinians.

Obama told Fox News in an interview Wednesday that additional settlement building doesn't make Israel safer. He said such moves make it harder to achieve peace in the region, and embitters the Palestinians in a way that he said could be very dangerous.

"The situation in the Middle East is very difficult, and I've said repeatedly and I'll say again, Israel's security is a vital national interest to the United States, and we will make sure they are secure," Obama said in the interview.

Obama and the Palestinians have demanded that Israel halt settlement construction.

An aide to Prime Minister Benjamin Netanyahu on Wednesday dismissed U.S. anger at Israel's approval for new homes in a settlement near Jerusalem.

Netanyahu's aide also sent reporters a message calling the building plan "a routine process." He said Netanyahu does not normally review municipal building plans and saw Gilo as "an integral part of Jerusalem."

"Construction in Gilo has taken place regularly for dozens of years and there is nothing new about the current planning and construction," the aide added.

Netanyahu seemed keen to contain the fresh dispute with Washington over settlements, ordering cabinet ministers to show restraint after the White House criticized the plan.

An official said the order went out after a deputy minister was quoted by an Israeli news website as accusing the United States of "behaving like a bull in a china shop" for objecting to the building plan for an area in the West Bank that Israel sees as part of Jerusalem.

Publication of the government commission's blueprint for Gilo on Tuesday drew sharp rebukes from the Palestinians, joined by Washington, Europe and the United Nations.

Abbas aide: Plan destroys chances for peace

Nabil Abu Rdaineh, aide to Palestinian President Mahmoud Abbas, condemned the building plan, saying it "destroys the last chances for the peace process."

Abbas has said peace talks could resume only if settlement building stopped, a demand rejected by the United States which has echoed Israel in calling for negotiations, suspended for nearly a year, to start without preconditions.

Palestinian peace negotiator Saeb Erekat told an Israeli radio station on Wednesday that Netanyahu "has the choice - settlements or peace," and accused Israel of trying to decide the conflict by building instead of at the negotiating table.

French Foreign Minister Bernard Kouchner, visiting Jerusalem, said France regretted Israel's decision.

Housing Minister Ariel Attias, trying to minimize the plan's significance, called it a "technical" matter, telling Army Radio it could be a year or more before building began.

White House Press Secretary Robert Gibbs said in a statement "at a time when we are working to relaunch negotiations, these actions make it more difficult for our efforts to succeed."

The United States also objected to continued evictions and the demolition of Palestinian homes in East Jerusalem, he said.

UN Secretary-General Ban Ki-moon also deplored the Israeli move, spokesman Farhan Haq said. Ban "believes that such actions undermine efforts for peace and cast doubt on the viability of the two-state solution" for Israelis and Palestinians, he said.

Netanyahu has said he would avoid expanding existing settlements, but rejects demands to stop building in Jerusalem.

Gilo, where some 40,000 Israelis live, was built on West Bank land Israel captured in the 1967 Six-Day War and later annexed as part of Jerusalem.

Some 500,000 Jews live in the West Bank and East Jerusalem, also captured in 1967, among 2.7 million Palestinians.