Prime Minister Benjamin Netanyahu clashed publicly with President Obama on Tuesday over Israeli construction in disputed East Jerusalem, throwing a teetering Mideast peace effort deeper in doubt.

Responding to criticism from Obama, Netanyahu struck a defiant tone in commenting on plans to build 1,300 more Jewish housing units in East Jerusalem, saying his government had never agreed to limit construction in the city.

"Jerusalem is not a settlement. It is the capital of the state of Israel," Netanyahu said in a statement. "Israel sees no connection between the diplomatic process and the planning and building policy in Jerusalem."

Netanyahu's statement came hours after Obama warned that the new construction, announced by Israel on Monday, could harm a renewed Mideast peace effort began in early September. Obama made the remarks a few hours after arriving in Indonesia, his boyhood home for four years, where he was set to deliver the second major speech Wednesday in his outreach to the Muslim world.

"This kind of activity is never helpful when it comes to peace negotiations, and I'm concerned that we're not seeing each side make that extra effort involved to get a breakthrough," Obama said. "Each of these incremental steps end up breaking trust."

Israel also is moving ahead with 800 units in the West Bank settlement of Ariel, Israeli news reports said Tuesday.

Saeb Erekat, the chief Palestinian negotiator, said Israel's latest expansions are part of "a premeditated process to kill the possibility of an independent Palestinian state." He said that if the Obama administration is unable to get peace talks back on track in the coming weeks, it should recognize an independent Palestinian state with pre-1967 borders.

Israel claims all of Jerusalem, but the Palestinians claim East Jerusalem, which was captured in the 1967 Middle East War, as the capital of their future state. The international community does not recognize Israel's annexation of the city's eastern sector, and a succession of American administrations have urged Israel not to build there.

Netanyahu's pronouncement was consistent with Israeli policy, yet his sharp tone may embarrass Obama at a moment of vulnerability. Obama is visiting the world's largest Muslim country, and the rebuke may again raise questions in the Muslim world about how much influence the American leader really has on a priority issue.

The disagreement also comes a week after Obama suffered a setback in the midterm elections, which gave Republicans, who are likely to be sympathetic to Netanyahu's point of view, majority control of the House of Representatives. Some Israeli officials and U.S. analysts had predicted before the election that Netanyahu might feel emboldened to push back on Obama if the Democrats fared poorly.

Obama launched a new peace effort Sept. 1, but it has been nearly stalled as the Palestinians refuse to negotiate unless Israel halts construction in the disputed areas. Palestinian leaders contend that the Jewish settlers are taking land whose ownership should be decided in negotiations.

Robert Danin, a former U.S. official and specialist on Arab-Israeli issues, said it may have been politically risky for Netanyahu to oppose the new construction project, since Israelis view such building as fully within their rights.

With Netanyahu planning to meet Secretary of State Hillary Rodham Clinton in Washington on Thursday, the strong words will not help the U.S. efforts to bring the two sides back to the peace table, said Danin, who is with the Council on Foreign Relations.

"For there to be a deal, the temperature has to come down," he said.

Israel's go-ahead to build 1,300 homes in East Jerusalem met with a storm of disapproval from around the world, including all four members of the diplomatic "quartet" that seeks to promote the Mideast peace talks: the United Nations, the European Union, Russia and the United States.

The Russian Foreign Ministry said in a statement that Russia views the announcement "with most serious concern.… We find it essential that the Israeli party refrain from the declared construction."

Obama's relationship with Netanyahu has gone through alternating periods of warm and cool. Obama was furious with Netanyahu in March, when new construction was announced in East Jerusalem just as Vice President Joe Biden was visiting. In July, Obama warmly welcomed Netanyahu to the White House.

Yet Obama has maintained pressure on the Israeli prime minister like few recent presidents. In September, he called on Netanyahu from the podium of the United Nations General Assembly to halt settlement construction in the name of peace, a plea Netanyahu has so far resisted.