JERUSALEM- Israel on Wednesday fended off criticism of its approval of hundreds of new homes in annexed Arab east Jerusalem as France urged a resumption of stalled Middle East peace talks.

"Freezing construction in Gilo is just like freezing construction... in any other neighborhood in Jerusalem and Israel," Interior Minister Eli Yishai, whose ministry issued the approval on Tuesday, told AFP.

He was referring to the settlement in which the previous day Israel approved the addition of 900 new housing units, a move that drove another stake into already hobbled US-led efforts to restart negotiations that were suspended during the Gaza war at the turn of the year.

"Construction in Jerusalem cannot be halted and Gilo is in Jerusalem," Yishai said.

Gilo is one of a dozen Jewish settlements in the eastern part of the Holy City that the Palestinians want to make the capital of their promised state.

France added its voice to the chorus of Western condemnation of the move.

"It is a decision that we regret," French Foreign Minister Bernard Kouchner said in Jerusalem hours before he was to meet with Prime Minister Benjamin Netanyahu and other senior officials in Jerusalem.

"We have to restart with the political discussions," he said.

Israel captured east Jerusalem during the 1967 Six Day War and later annexed it in a move not recognized by the international community. It views the entire Holy City as its "eternal, indivisible" capital and does not consider Jewish neighborhoods in the eastern part as settlements.

The move to approve the new units flew in the face of Palestinian calls for a complete freeze on new building ahead of fresh peace talks.

Washington was quick to say that it was "dismayed" at the decision.

"At a time when we are working to re-launch negotiations, these actions make it more difficult for our efforts to succeed," said White House spokesman Robert Gibbs.

Israeli news reports said that Netanyahu had rejected a request from his US ally to halt construction in Gilo, but it was not clear whether the request concerned the project approved on Tuesday.

Unite Nations chief Ban Ki-moon also slammed the move, saying it "undermined efforts for peace and cast doubt on the viability of the two-state solution."

The approval is likely to further hamper Washington's so-far futile efforts to get Israelis and Palestinians back to the negotiating table, amid deep disagreements over the thorny issue of settlements.

The Palestinians demand that Israel freeze all settlement construction in the occupied West Bank, including annexed east Jerusalem, before any resumption of talks but Israel has so far offered only a limited reduction in new building.