Israel's interior minister, Eli Yishai, has given final approval for the construction of 1,600 new settlements in East Jerusalem and will approve 2,700 more shortly, his spokesman told AFP on Thursday.

The move is likely to aggravate both the Palestinians and the international community. The ministry will therefore struggle to relaunch peace talks in a bid to snub the Palestinian plan to seek United Nations membership.

Spokesman Roei Lachmanovich said Yishai had given final approval for the construction of 1,600 units in the Ramat Shlomo neighbourhood in North East Jerusalem.

"He has approved 1,600 homes in Ramat Shlomo and will approve 2,000 more in Givat Hamatos and 700 in Pisgat Zeev," Lachmanovich said, referring to two additional Jewish neighbourhoods in East Jerusalem.

The 1,600-house construction in Ramat Shlomo has already caused a diplomatic rift between Israel and Washington.

Yishai's interior ministry first announced the project in March 2010, when US Vice President, Joe Biden, visited Israel and the Palestinian territories to lay the groundwork for direct peace talks between the two sides.

The announcement was criticised by Washington, leaving Israeli Prime Minister Benjamin Netanyahu red-faced as he sat down for talks with Biden.

But Lachmanovich said Yishai’s approvals were "economic" and not political, thus blaming the interior minister’s decision for the demonstrations over housing prices and the cost of living that have rocked Israel in recent weeks.

"These [settlements] are being approved because of the economic crisis here in Israel; they are looking for a place to build in Jerusalem, and these will help," he said.

Last week, the interior ministry issued a similar green-light for the construction of 900 new homes in the East Jerusalem settlement neighbourhood of Har Homa, which lies in the South West of the city, neighbouring Bethlehem.

Yishai, a member of the ultra-Orthodox Shas party, also linked the construction project to the protest movement, saying it would help address the "real estate crisis."

Israeli news site, Ynet, quoted him as saying he had directed his staff to promote the construction of small housing units in the settlement neighbourhood "in an effort to enable all Israeli citizens to purchase an apartment."

The approval of that project was swiftly condemned by many in the international community, including the United States and the European Union.

Israel captured East Jerusalem in the 1967 Six Day War, annexing it later in a move never to be recognised by most of the international community.

It claims both sides of the Holy City as its "eternal, indivisible" capital, and does not view construction in the East to be settlement activity.

EU foreign policy chief, Catherine Ashton, said she was "profoundly disappointed" by the Har Homa announcement, and that its timing was particularly regrettable.

The EU is working with other members of the international peacemaking Quartet, which also includes the United States, United Nations and Russia, to draft a new framework for peace talks between Israel and the Palestinians.

Quartet members are hoping that the potential relaunch of negotiations could sway the Palestinians to drop their bid to seek UN membership for a Palestinian state this September.

But the Palestinians have said they will not return to the negotiating table without preventing Israeli settlement construction and a clear framework for talks.

They insist their UN bid is not incompatible with new negotiations and they have no plans to drop the bid, even if talks resume.