The Prime Minister, Benjamin Netanyahu, vowed to continue building homes for Jewish families in East Jerusalem, despite objections from Palestinians who claim the territory as the capital of their hoped-for state.
Mr Netanyahu spoke after the European Union's foreign policy chief criticised plans to build 800 new flats and a military college on contested land. "We are not imposing any restrictions on construction in Jerusalem," Mr Netanyahu told his cabinet. "It is our capital."
A senior aide to the Palestinian President, Mahmoud Abbas, accused Mr Netanyahu of deliberately destroying prospects for peace. The Israeli leader's comment "comes in the context of the continuing destruction of the peace process and the two-state solution", Nabil Abu Rdeneh said.