The European Union on Thursday said it "deplores" Israel's decision to build new settler homes in East Jerusalem, recalling that settlements were illegal under international law.

Israeli Prime Minister Benjamin Netanyahu on Wednesday agreed plans to build 1,500 new settler homes in the city's Arab sector, a move the Palestinians said "destroys the peace process".

"I would like to recall that, on 27 September, the Middle East Quartet called on all parties to refrain from actions that undermine trust or prejudge final status issues," EU foreign policy chief Catherine Ashton said in a statement.

"The EU has repeatedly stated that settlements are illegal under international law. It has also called on Israel to end all settlement activity, including natural growth, and to dismantle outposts erected since March 2001.

"The EU deplores the recent settlement announcements. Any actions that could hamper or undermine the on-going negotiations must be avoided," Ashton said.

"Bold and decisive leadership is needed for these negotiations to succeed."

A spokesman for Palestinian president Mahmud Abbas, Nabil Abu Rudeina, said the move "is a message to the international community that Israel is a country that does not respect international law".

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