EU foreign policy chief Catherine Ashton condemned Israel's approval of 900 new housing units in East Jerusalem, AFP reported on Friday, saying the new move damaged Israel's prospects for peace.

The housing project will expand the East Jerusalem neighborhood of Har Homa which is within what is defined as Jerusalem’s city limits, but is directly adjacent to the Palestinian town of Bethlehem.

"The European Union has repeatedly urged the government of Israel to immediately end all settlement activities in the West Bank, including in East Jerusalem. All settlement activities are illegal under international law,” AFP quoted Ashton as saying in a statement.

"Continued settlement undermines trust between the parties and efforts to resume negotiations. This is especially true with regard to Jerusalem," the EU chief said, adding  "I believe there can be no sustainable peace in the Middle East without a two-state solution with the state of Israel and a viable and contiguous Palestinian state living side by side in peace and security."

"Settlement activity damages this prospect," she cautioned.

Talks between Israel and the Palestinians hit a standstill in September of 2010 when Israel resumed settlement building after a nine-month moratorium.

Ashton’s condemnation comes shortly after top Palestinian negotiator Saeb Erekat’s issued a statement slamming Israel's decision to expand the East Jerusalem neighborhood.

Erekat claimed Netanyahu's government is "determined to invest solely in the entrenchment of the occupation, rather than peace."