They said the plans showed Israel was "not ready for peace".

Israel's housing ministry announced on Monday that it has invited contractors to bid on the construction of 198 housing units in Pisgat Zeev, 377 homes in Neve Yaakov and 117 dwellings in Har Homa, which are built on land captured in the 1967 Arab-Israeli war.

It is part of an invitation to bid for contracts on 6,500 housing units across the country.

The new buildings will make apartments cheaper and more affordable for young families, the Israeli Housing Ministry said.

Last month, Israel announced a 10-month suspension of new building in settlements in the occupied West Bank, under heavy pressure from the US.

But the right-leaning government of Israeli Prime Minister Benjamin Netanyahu has made it clear that it does not regard Jewish areas in Jerusalem as settlements and the restrictions do not apply there.

The Palestinians have refused to resume peace talks without a complete halt to settlement building in the West Bank, including East Jerusalem.

'Eternal capital'

In November, US President Barack Obama warned that Israel's plans to build 900 new homes in Gilo, to the south of Jerusalem, would create a "dangerous situation".

Mr Obama told Fox News that additional settlement construction made it harder for Israel to make peace in the region and "embitters the Palestinians".

"The Israeli government proves every day that it is not ready for peace," said Nabil Abu Rdainah, a spokesman for Palestinian Authority President Mahmoud Abbas.

But Israel says that East Jerusalem is part of the "indivisible and eternal" Israeli capital.

Israel's annexation of the east of the city has never been recognised by the international community.

About 500,000 Israelis live in the West Bank and East Jerusalem, in settlements illegal under international law.