Israel pushed ahead on Wednesday with plans to build more settlements as UN chief Ban Ki-moon voiced deep concern and said the Mideast peace process was in a "deep freeze", DPA reported.
An Israeli planning committee approved construction of 2,610 housing units in Givat Hamatos, a highly controversial new settlement to be erected on a hill southeast of Jerusalem.
The Peace Now settlement watchdog slammed the move, saying the project, long opposed by Palestinians, would cut off the southern West Bank city of Bethlehem from East Jerusalem.
"The Netanyahu government is ruining with its own hands the chance for a two-state solution for two peoples and as such harms Israel's interest for peace," Peace Now spokeswoman Hagit Ofran told dpa.
She accused Prime Minister Benjamin Netanyahu and his Likud party of "exploiting" the period ahead of Israel's January 22 elections.
Israel has already approved thousands of other settlement projects in response to the November upgrading of the Palestinian status at the United Nations to that of "non-member state."
UN Secretary General Ban said Israelis and Palestinians now seemed more polarized than ever, and a two-state solution farther away than at any time since the Oslo process began in 1993.
He said the peace process was now in "deep freeze," speaking in an end-of-year news conference in New York.
"I am deeply concerned by heightened settlement activity in the West Bank, in particular around Jerusalem," he said. "This gravely threatens efforts to establish a viable Palestinian state."
"I call on Israel to refrain from continuing on this dangerous path, which will undermine the prospects a resumption of dialogue and a peaceful future for Palestinians and Israelis alike - let us get the peace process back on track before it is too late."
Netanyahu told envoys from Asian and Pacific countries on Wednesday that Jerusalem has been the capital of the Jewish people for 3,000 years, and Israel would continue to build it.
Israel claims its settlements around Jerusalem - built within the Israeli-drawn municipal boundaries but beyond the so-called "green line" separating the Jewish state from the West Bank - as inseparable parts of its self-declared, but unrecognized capital.
"This is something natural, and I ask each of you to imagine that you would be restricted in building in your capitals," he said.
The Palestinians want East Jerusalem as the capital of a future state and say Israeli construction is encroaching on the city's Arab neighbourhoods. Israel claims its settlements around Jerusalem will fall under Israeli sovereignty under a future peace deal.
The Peace Now group's Ofran meanwhile said yet another construction project was expected to be approved in the southern Jerusalem settlement of Gilo, probably as early as Thursday.
Ofran called the construction "unprecedented", since the 1986-92 government of former right-wing premier Yitzhak Shamir.
The latest settlement planning approval came as the country's elections commission banned an Arab-Israeli lawmaker from running in the upcoming polls, after she was accused by other lawmakers, including from Likud, of anti-Israel actions.
The initial approval was granted by Jerusalem's Local Planning Committee, despite a storm of international criticism over Netanyahu's moves, including from the US.
UN Under-Secretary-General for Political Affairs Jeffrey Feltman in the Security Council said: "We urgently ask the Israeli government to hear the international calls to stop the settlements."
He also criticised Israel for blocking tax and customs payments to the Palestinian Authority, saying "Israel is undermining the authority of the Palastenian leaders when it witholds the money."
The latest project follows on the heels of initial approval given for 1,500 housing units in the northern Jerusalem settlement of Ramat Shlomo, more than 3,000 in the E1 area between Jerusalem and the settlement of Ma'aleh Adumim to the east of the city, and an additional 3,000 elsewhere in East Jerusalem and the West Bank.