A Palestinian official on Thursday warned that Israel is planning to encircle the Old City in disputed East Jerusalem with Jewish settlements.

Such a move would increase tensions since the majority of residents there are Arabs and the walled compound in the Old City includes the holy Al-Aqsa Mosque.

The official, Hatem Abdul-Kader, told Voice of Palestine radio that this plan was "oppressive" as some 310 Palestinian houses in nearby Arab neighborhoods would be demolished.

The new project will take the shape of a crescent and would embrace the Old City, Abdul-Kader said.

The Palestinians want East Jerusalem to be the capital of their future state, while the Israelis view Jerusalem as their indivisible capital.

Last month, Israel approved 1,600 homes for Jews there, hindering the U.S.-proposed proximity negotiations with the Palestinians.