U.S. President Barack Obama is critical of Israel's plan to build 900 more housing units in a part of Jerusalem claimed by Palestinians. (Reuters)

U.S. President Barack Obama on Wednesday said Israel's approval of a plan to build 900 more housing units in a part of Jerusalem claimed by Palestinians is potentially dangerous.

"I think that additional settlement building does not contribute to Israel's security," Obama told Fox News on Wednesday. "I think it makes it harder for them to make peace with their neighbours. I think it embitters the Palestinians in a way that could end up being very dangerous."

The Jerusalem district planning commission officially deposited the plan on Tuesday to build the homes in the Jewish neighbourhood of Gilo and opened it to comments, objections and appeals from the public. Jerusalem city spokesman Gidi Schmerling said final approval was "many months" away.

Publication of the plans were contentious, however, because Palestinian leader Mahmoud Abbas has called for the halt to all settlement construction in areas claimed by Palestinians as a potential site of a future self-governed state.

And it comes a few weeks after Israeli Prime Minister Benjamin Netanyahu had offered to limit new construction in the West Bank — another region claimed by Palestinians — suggesting Israel was willing to make some concessions to return to the negotiating table in Mideast peace talks.

Israel rejects claims on Jerusalem

But the Israeli government has rejected efforts to restrict building in East Jerusalem, which it considers part of Israel.

In a statement Tuesday, the office of Israeli Prime Minister Benjamin Netanyahu defended the new construction plan.

"This concerns a routine procedure of the district planning commission," the statement said. "The neighbourhood of Gilo is an integral part of Jerusalem."

Israel captured both the West Bank and East Jerusalem in the 1967 war with Egypt, Jordan and Syria, and annexed them, but no other country has recognized that move.

Some 500,000 Israelis live in the West Bank and East Jerusalem alongside 2.8 million Palestinians.

'Decision on Gilo is wrong'

United Nations Secretary General Ban Ki-moon's office was also highly critical of the construction plan, issuing a statement on Tuesday that called on Israel to respect its commitments "to cease all settlement activity, including natural growth."

Britain's foreign secretary said the planned construction undermines any deal for a two-state solution in the region where Jerusalem is a shared capital.

"Expanding settlements on occupied land in East Jerusalem makes that deal much harder. So this decision on Gilo is wrong and we oppose it," the statement said.

In past peace negotiations, formulas have been raised to allow Israel to keep its new Jerusalem neighbourhoods, while Palestinians would receive control of Arab sections of the city and land from Israel as compensation. Those negotiations broke down without agreement, however.

With files from The Associated Press