Israel's Interior Ministry gave the final green light Thursday to the construction of more than 900 new homes in a Jewish development built on land seized during the 1967 Mideast war.

Palestinians and anti-settlement groups said the Har Homa expansion, which has been working its way through Israeli regulatory agencies since last year, will occupy one of the last remaining undeveloped hillsides in the area and effectively cut off direct access between Palestinian neighborhoods in East Jerusalem and Bethlehem.

Palestinians hope to one day include both areas in a contiguous, independent state.

"This is very alarming because it will create a very big obstacle to the two-state solution," said Hagit Ofran of Peace Now, an Israeli group that tracks settlements.

She said the project, one of the largest planned in East Jerusalem in recent years, appears to have been fast-tracked, based on the speed of the approval process. Nevertheless, she said construction would not likely break ground for three more years.

The Har Homa project, which experts say will be built partly on formerly private Palestinian land, has generated controversy from the start. It was one of the first developments announced last fall after Israel's 10-month partial construction moratorium expired.

Another government hurdle was cleared in May, just as Israeli Prime Minister Benjamin Netanyahu was preparing to meet President Obama at the White House to discuss attempts to restart peace talks. The timing of the May meeting was seen by some as an attempt to embarrass Obama, who had just surprised Israelis by publicly calling for negotiations to be based on 1967 borders, with agreed-upon swaps. Netanyahu opposed adopting such a framework.

The Har Homa expansion will likely harden the resolve of Palestinians, who plan to ask the U.N. for formal statehood recognition in September.

Efforts to relaunch peace talks have failed, and Palestinians say they will not return to the negotiating table as long as Israel continues to expand settlements.

Last month, the Israeli government announced it would seek approval for an additional 300 units in two West Bank settlements, drawing international condemnation.