European Union foreign policy chief Catherine Ashton on Thursday criticised Israel for offering tenders this week for the construction of 1,213 new homes in settlement neighbourhoods of east Jerusalem.
Ashton said in a statement she "deeply regrets" moves to add 607 units in Pisgat Zeev and 606 units in Ramot.
"Settlements are illegal under international law and threaten to make a two-state solution impossible," it said.
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Israeli settlement building in the West Bank and east Jerusalem is one of the most contentious issues of stalled Israeli-Palestinian peace talks and led to direct negotiations being put on hold in September 2010.
"Continuous expansion of settlements, wherever this takes place, further complicates ongoing diplomatic efforts to avoid a deterioration in the prospects for a return to negotiations at this critical time," Ashton said.
"The EU has repeatedly urged the government of Israel to immediately end all settlement activities in the West Bank, including in East Jerusalem."
The Palestinians say they will not hold talks while Israel builds on land they want for their future state, while Israel says it wants negotiations without preconditions.
The number of settlers in the West Bank has grown to around 340,000, with another 200,000 living in east Jerusalem.