Israel's interior minister Eli Yishai has given final approval for the construction of 1,600 new settler homes in east Jerusalem, his spokesman told AFP on Thursday.

The move is likely to anger both the Palestinians and the international community, as it struggles to find a way to relaunch peace talks in a bid to head off a Palestinian plan to seek United Nations membership.

Roei Lachmanovich also said the interior minister was set to give final approval for another 2,700 settler homes in east Jerusalem neighborhoods in "a couple of days."

"He has approved 1,600 homes in Ramat Shlomo and will approve 2,000 more in Givat Hamatos and 700 in Pisgat Zeev," Lachmanovich said.

The 1,600-house construction in Ramat Shlomo has already caused a diplomatic rift between Israel and Washington.

It was first announced as US Vice President Joe Biden visited the region in March 2010 for talks with Israeli and Palestinian leaders in a bid to lay the ground for new direct peace talks between the two sides.

The timing of the announcement angered Washington and prompted the Palestinians to accuse Israel of lacking a commitment to restarting the peace process.

PA official Saeb Erekat slammed the most recent announcement on Thursday saying “this approval and the reported plan for additional expansion in illegal settlements across the occupied Palestinian Territory, especially occupied East Jerusalem, is further proof that this government is committed to investing in occupation rather than peace.”

But Lachmanovich said the final approvals were "economic" not political, tying the final go-ahead to protests over housing prices and the cost of living that have shaken Israel in recent weeks.

"These are being approved because of the economic crisis here in Israel, they are looking for a place to build in Jerusalem, and these will help," he said.

"This is nothing political, it's just economic."

The latest escalation in settlement building comes as Israel's interior ministry announced last week that it had approved the construction of 900 new homes in the east Jerusalem settlement neighborhood of Har Homa.

The move was widely condemned by the international community, including the United States and the European Union.

Israel captured east Jerusalem along with the rest of the West Bank in the 1967 Six Day War and later annexed it in a move not recognized by the international community.

Israel does not view construction in the east to be settlement activity, calling both east and west Jerusalem its "eternal, indivisible" capital, and some 200,000 Israelis now live in east Jerusalem amid nearly 270,000 Palestinians.

The international community, including the United States, has regularly criticized Israel for building settlements in the West Bank and particularly east Jerusalem, describing them as counterproductive and calling for a halt to all such construction.

More than 300,000 Israeli settlers live in the West Bank and settlement construction is a major obstacle to the resumption of negotiations.

Israel openly opposes the Palestinian bid for UN recognition in September, instead insisting that the Israeli government is willing to begin peace talks.