The European Union said it "strongly opposed" the latest "extremely troubling" Israeli plans for more settler homes around Jerusalem which would only further undermine the peace process.
EU foreign affairs head Catherine Ashton said plans to build 2,610 houses in the Givat Hamatos settlement, along with the 1,500 in Ramat Shlomo announced in November would effectively cut Bethlehem off from Jerusalem.
"I strongly oppose this unprecedented expansion of settlements around Jerusalem," Ashton said in a statement early Thursday.
"The EU particularly opposes the implementation of plans which seriously undermine the prospects of a negotiated resolution of the conflict by jeopardising the possibility of a contiguous and viable Palestinian state and of Jerusalem as the future capital of two states.
"In the light of its core objective of achieving the two-state solution, the EU will closely monitor the situation and its broader implications, and act accordingly," she said.
Ashton called again for both sides to show the leadership required to get the peace process back on track.
Earlier, the United Nations and UN Security Council condemned Israel's moves.
The United States, Israel's close ally, did not join the public attack on Israel but slammed the "provocative" act during closed UN Security Council consultations.
Israel has approved thousands of new homes in the West Bank and occupied East Jerusalem since the UN General Assembly voted on November 29 to recognise Palestine as a non-member state.
Israel has approved plans for the construction of 523 homes in the southern West Bank in the first step towards creating a new settlement city, the local settler council said on Thursday.
"After years, we are happy to announce that the government of Israel has decided to build a city in Gush Etzion," David Perel, head of the Gush Eztion regional council, told AFP, saying the defence ministry had approved plans for 523 homes in Gevaot settlement.