To a barrage of international criticism, Israel has moved a step closer to building a new neighbourhood in East Jerusalem - the first since 1997.

As part of an attempt by Israel to send out a message that it is developing East Jerusalem for both Arabs and Jews, only two thirds of the 2,610 units in the development plan will be part of the new Jewish district, Givat Hamatos. The rest will form an extension to the adjacent Palestinian village of Beit Safafa.

Last week, officials submitted the proposal for "reparcelisation", a legal process that paves the way to construction. Members of the public and organisations now have less than two months to state their objections. If the process goes according to plan, work is expected to start in one to two years.

Britain, the European Union and the United Nations have condemned the construction plan, as have Palestinian leaders.

"It's counterproductive at a time when Netanyahu is talking of willingness to broker a deal with the Palestinians," said Xavier Abu Eid, spokesman for the Palestine Liberation Organisation team that negotiates with Israel.

He said that Givat Hamatos will prove "one of the most damaging settlements for a future solution to the conflict" because it will be close the "ring of settlement" around East Jerusalem, cutting it off from the West Bank. He said: "You are not only destroying the landscape around Bethlehem but also disconnecting Bethlehem from Jerusalem."

The Israeli activist group Peace Now took a similar view, claiming the Givat Hamatos plan is a "game changer".

But the Israeli right says that Jerusalem needs the housing and is entitled to build.

"Unfortunately, there are still countries in the world that have not yet understood that building throughout all of Israel is an integral part of Israeli policy," said deputy Knesset speaker Danny Danon. "To stop Israel from building in Givat Hamatos is the same as stopping the US from building on Capitol Hill."