A senior EU official has criticised an Israeli decision to build more houses in occupied East Jerusalem, joining the US in condemning Israel.
The Har Homa development already houses 2,000 settler families
External Relations Commissioner Benita Ferrero-Waldner said she was "very concerned" about a plan for 300 new homes on land captured in the 1967 war.
"We want to have a successful peace process," Ms Ferrero-Waldner said.
In rare condemnation by the US, the secretary of state said it threatened new Israeli-Palestinian talks.
Benita Ferrero-Waldner, the former Austrian foreign minister, was speaking after talks with Palestinian Authority Prime Minister Salam Fayyad in Brussels.
Mr Fayyad said the fresh settlement activity was against "the letter and the spirit" of the recent Arab-Israeli peace conference.
"Those actions are clearly inconsistent with the overall direction this process should take if it is to produce an outcome that is satisfactory to all; lasting peace in the Middle East," he said.
He said the Palestinian Authority would seek $5.6bn (£2.7bn) in aid for 2008-10 at a donors' conference next week in Paris.
The first face-to-face meeting after last month's Annapolis summit is due to take place on Wednesday.
Under obligations contained in the international peace plan known as the roadmap, agreed in 2003 and revived in 2007, Israel must cease settlement activity on occupied land.
However, Israel says the restriction does not apply in East Jerusalem, which it annexed in 1967. The annexation has not been recognised internationally.
Secretary of State Condoleezza Rice said the plan "doesn't help build confidence", after meeting Israeli Foreign Minister Tzipi Livni in Brussels on Friday.
The new units will be built at Har Homa settlement, which already has about 2,000 houses, in an area of south-east Jerusalem known to Palestinians as Jabal Abu Ghneim.