Lady Ashton wants to prepare the ground for fresh peace talks
EU foreign policy chief Baroness Ashton has said Israel's decision to build new settler homes in occupied East Jerusalem endangers peace talks.
She was speaking to Arab League members in Cairo, as she began a Middle East tour amid tensions over Israel's move.
The EU is part of the Middle East Quartet, which has condemned Israel's plan to build 1,600 new homes for Jewish settlers in East Jerusalem.
Egypt said it had asked Lady Ashton to convey the world's anger to Israel.
Speaking in Cairo, she said: "Recent Israeli decisions to build new housing units in East Jerusalem have endangered and undermined the tentative agreement to begin proximity talks.
"The EU position on settlements is clear. Settlements are illegal, constitute an obstacle to peace and threaten to make a two state-solution impossible."
Lady Ashton, officially the EU's High Representative, plans to visit the Gaza Strip after Egypt, the first leg of her tour.
She held talks with Egyptian Foreign Minister Ahmed Abul Gheit in Cairo on Monday. She will later travel to Syria, Lebanon, Jordan, Israel and the Palestinian Territories.
The EU is the largest aid donor to the Palestinians, providing 1bn euros (£905m; $1.4bn) annually - half of it from the European Commission.
Pressure for peace
Speaking before her tour, Lady Ashton said there was "a sense of urgency at the moment and a need to make progress on the Arab-Israeli conflict".
She said she was "hopeful" of visiting Gaza.
"I want to see for myself how we are spending our money and what kind of impact it has on the ground," she said.
The Quartet, which also includes the UN, Russia and the US, has called for an urgent resumption of dialogue between Israel and the Palestinians. It will review the situation at a meeting in Moscow on Friday.
Last month, the European Court of Justice ruled that Israeli goods made in Jewish settlements in the occupied West Bank could not be considered Israeli.
It meant goods made by Israelis or Jews in the West Bank will not benefit from a trade deal giving Israel preferential access to EU markets.
Jewish settlements in the West Bank are illegal under international law.