Israel does not include East Jersusalem in a pause in building in the West Bank
Israel has announced plans for nearly 700 homes in mainly Arab East Jerusalem - despite Palestinian and international demands that it freeze building there.
The US and EU criticised the move, which follows plans unveiled last month for 900 homes on occupied land in Gilo, south of Jerusalem.
Israel occupied East Jerusalem in 1967 and later annexed it, in a move not recognised internationally.
The Palestinians want to locate their future capital in East Jerusalem.
They said the plans showed Israel was "not ready for peace".
White House spokesman Robert Gibbs said in a statement: "The United States opposes new Israeli construction in East Jerusalem."
Washington reiterated its call for both sides to resume stalled peace talks as soon as possible.
The European Union said it was "dismayed" by the announcement.
"Settlements on occupied land are illegal under international law," it said.
The new plans "contravene repeated calls from the international community and prevent the creation of the an atmosphere conducive to resuming negotiations," a statement from the Swedish EU presidency said.
Israel's housing ministry announced on Monday that it has invited contractors to bid on the construction of 198 housing units in Pisgat Zeev, 377 homes in Neve Yaakov and 117 dwellings in Har Homa, which are built on land captured in the 1967 Arab-Israeli war.
It is part of an invitation to bid for contracts on 6,500 housing units across the country.
The new buildings will make apartments cheaper and more affordable for young families, the Israeli housing ministry said.
Last month, Israel announced a 10-month suspension of new building in settlements in the occupied West Bank, under heavy pressure from the US.
But the right-leaning government of Israeli Prime Minister Benjamin Netanyahu has made it clear that it does not regard Jewish areas in Jerusalem as settlements and the restrictions do not apply there.
The Palestinians have refused to resume peace talks without a complete halt to settlement building in the West Bank, including East Jerusalem.
'Arab homes planned'
However, Jerusalem municipality said plans had recently been proposed for 500 new homes intended for Arab residents in the mainly Arab area of Silwan in East Jerusalem, and to allow the legalisation of 500 existing Arab homes.
Silwan is a controversial area, where Jewish groups have been attempting to acquire land, and dozens of Arab homes are under demolition orders.
Many of the homes are built without permits, which Israeli-Arab and Palestinian residents say are very difficult for them to get.
Israel says that East Jerusalem is part of the "indivisible and eternal" Israeli capital.
Israel's annexation of the east of the city has never been recognised by the international community.
About 500,000 Israelis live in the West Bank and East Jerusalem, in settlements illegal under international law.