U.S. Secretary of State Hillary Clinton said on Tuesday that Israel's decision to build 1,100 homes in Jerusalem's contested Gilo neighborhood, which lies beyond the Green Line, is counter-productive to reviving peace talks with the Palestinians.

"We believe that this morning's announcement by the government of Israel approving the construction of (1,100) housing units in East Jerusalem is counter-productive to our efforts to resume direct negotiations between the parties," Clinton told reporters at a news conference.

"As you know, we have long urged both sides to avoid any kind of action which could undermine trust, including, and perhaps most particularly, in Jerusalem, any action that could be viewed as provocative by either side," she added.

The European Union's foreign policy chief Catherine Ashton also expressed disappointment with Israel's new plan to build homes in Gilo, saying they "should be reversed" since it undermines peace negotiations with the Palestinians.

Ashton told the EU parliament that she heard "with deep regret" that Israeli plans to build homes beyond the Green Line were continuing.

Speaking in Strasbourg, France, Ashton said the expansion of settlements "threatens the viability of an agreed two-state solution" between the two sides, as backed by the EU, the United States, Russia and the United Nations.

The Palestinians also condemned Israel's construction plans in Gilo.

"The Israeli Prime Minister claims to have no preconditions, but with this decision is putting concrete preconditions on the ground," the Palestinian Prime Minister's Office said in a statement.

"[Netanyahu] says there should be no unilateral steps, but there could be nothing more unilateral than a huge new round of settlement building on Palestinian land. The Israeli Prime Minister told the UN that he had come to tell the truth, but it is this decision which tells the truth.”

In New York on Monday, a divided UN Security Council met behind closed doors for its first discussion of last week's Palestinian application for full UN membership as a state.

The move seems certain to fail due to Israeli and U.S. opposition, despite substantial support by other governments.

A spokesperson for Palestinian President Mahmoud Abbas said it was up to the Security Council to put a stop to Israel's settlement policy "which is destroying the two-state solution and putting more obstacles in front of any effort to bring about a resumption of negotiations".