Israel will build 884 more houses in east Jerusalem, the housing ministry said on Sunday, in a move that enraged the Palestinians who have demanded the area as the capital of their promised state.

"We will invite tenders for the construction of 121 housing units in Har Homa and 763 others in Pisgat Zeev," ministry spokesman Eran Sidis told AFP, referring to two neighbourhoods in Arab east Jerusalem.

Israel occupied and annexed the eastern half of the city after the 1967 war in a move not recognised by the international community or the Palestinians, who have demanded it as their capital in recently revived peace talks.

"These offers are being published for the occasion of Jerusalem Day (on Monday), celebrating the 41st anniversary of the reunification of the city," Sidis said, referring to the occupation of east Jerusalem in the Six-Day War.

Jerusalem Mayor Uri Lupolianski told public radio the move was necessary to address the "urgent need for housing for the Jewish population."

But Palestinians slammed the decision, saying it undermined peace efforts.

A statement from the office of Palestinian president Mahmud Abbas called the decision a "dangerous threat" to the peace process which it said "cannot advance without a complete and total halt to settlement activity."

The Israeli settlement watchdog Peace Now also criticised the move, which it called part of a larger effort by the Israeli right to preempt the division of the city in a final peace deal.

"More settlements in Jerusalem will mean that the physical ability to have compromises between Israelis and Palestinians will be harder," Peace Now director Yariv Oppenheimer told AFP.

Egypt called the move a "stab in the hopes for peace" and called for greater international pressure on Israel to halt the growth of settlements.

"The silence of the international community in the face of these Israeli moves is no longer acceptable, as it renders peace negotiations void of meaning," foreign ministry spokesman Hossam Zaki said in a statement in Cairo.

The latest planned expansions come on the eve of the next scheduled meeting between Olmert and Abbas, who have pledged to try to strike a full peace deal by January 2009.

The two have held several meetings since the talks were relaunched at an international conference hosted by US President George W. Bush in November, but they have made little apparent progress since then.

The Palestinians have repeatedly called the expansion of Jewish settlements in the West Bank including east Jerusalem the biggest obstacle to a final peace deal.

Israel considers the whole of Jerusalem its "eternal, undivided" capital and insists it will continue to build in both the city's eastern sector and in the larger settlement blocs in the West Bank that it intends to keep in any deal.

"It's clear that Har Homa and Pisgat Zeev will be part of Israel in any final status agreement," government spokesman Mark Regev told AFP. "This is not in any way in conflict with the peace process."

The Palestinian population of east Jerusalem currently stands at nearly 260,000 according to the Palestinian Authority, with the settler population at nearly 200,000, according to Peace Now.

A study released on Sunday found that Jewish birthrates in the city are rising to coverge with falling Arab birthrates at roughly four children per family.

But the study, carried out by the Jerusalem Institute for Israel Studies, said the net migration of Jews out of the city -- which Israel blames in part on a housing shortage -- is keeping the overall demographics the same.

The chances of reaching a full agreement before Bush leaves office in January 2009 have dimmed in recent days amid new corruption allegations against Olmert that threaten to unseat the prime minister.

On Monday, he is to head to the United States for a three-day visit during which he is expected to discuss both the peace process with the Palestinians and recently renewed negotiations with Syria.

The Palestinians fear that Israeli political manoeuvring, amid mounting calls for Olmert to step aside, could scuttle the peace process.

"Whenever there are internal problems in Israel it reflects on the Palestinian side," senior Palestinian negotiator Saeb Erakat told AFP.