JERUSALEM (AFP) –
Israel approved the construction of hundreds of new housing units in annexed east Jerusalem on Tuesday, driving another stake into troubled US efforts to restart Middle East peace talks.

The interior ministry said it approved the construction of 900 new units in Gilo, one of a dozen of Israeli settlements in mostly Arab east Jerusalem, adding that the project still faced review.

Earlier, Israeli media reported that hawkish Prime Minister Benjamin Netanyahu had refused a request from main ally Washington to halt construction in Gilo. It was not clear whether the request concerned the project approved on Tuesday.

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

The Palestinians demand that Israel freeze all settlement construction, including in east Jerusalem, before resuming the talks, while Israel has so far offered only a temporary and limited ease in building.

Palestinian president Mahmud Abbas said on Tuesday that the impasse has given him no choice but to seek international recognition of a Palestinian state, even as Europe and Washington discouraged the move.

"We feel we are in a very difficult situation," he said in Cairo after talks with Egyptian counterpart Hosni Mubarak. "What is the solution for us? To remain suspended like this, not in peace? That is why I took this step."

Palestinian officials said earlier this week they intended to ask the UN Security Council to recognise a state in a move analysts said was aimed at pressuring Israel amid the floundering US peace efforts.

The European Union, the Palestinians' biggest donor, joined the United States in discouraging the move and urged instead a return to peace talks with Israel.

"I don't think we are there yet," Swedish Foreign Minister Carl Bildt, whose country holds the EU's rotating presidency, told reporters in Brussels.

"I would hope that we would be in a position to recognise a Palestinian state but there has to be one first, so I think it is somewhat premature," he said.

The United States said it opposed any unilateral moves.

"We support the creation of a Palestinian state that is contiguous ... We are convinced that has to be achieved through negotiations between two parties," State Department spokesman Ian Kelly said on Monday.

French Foreign Minister Bernard Kouchner, who is due to meet with Abbas in Amman later on Tuesday and with Israeli leaders in Jerusalem the next day, said he will insist on a resumption of negotiations.

"We have to find ways to surmount the current obstacles," he told the Palestinian Al-Quds daily.

Netanyahu has warned that "any unilateral action will undo the framework of past accords and lead to unilateral actions from Israel."

And the Islamist movement Hamas, a bitter rival of Abbas's Fatah rival, also poured cold water on the move for international recognitiion.

"The proclamation of a Palestinian state should be the result of the resistance putting an end to the occupation ... and not a decision taken by (the Palestinian Authority) to fill the void after the political option has failed," Hamas's exiled political supremo Khaled Meshaal said in a statement.

Tuesday's construction approval will make the relaunching of talks more difficult because the issue of settlements in east Jerusalem is particularly sensitive.

Israel, which captured the eastern part of the city in 1967 and later annexed it in a move not recognised by the international community, sees the Holy City its "eternal, indivisible" capital and does not view Jewish construction in the east as settlements.

The Palestinians want east Jerusalem as the capital of their promised state and insist Israel stop building houses there.

The international community considers all Israeli settlements on occupied Palestinian land illegal.