JERUSALEM: Israeli Prime Minister Benjamin Netanyahu on Sunday pledged to continue unhindered construction in Jerusalem, including in its annexed eastern sector, despite criticism from the European Union.

"We are not putting any limitations on building in Jerusalem, it is our capital," he said at the start of the weekly cabinet meeting.

"The same way that (states) build in every capital -- London, Paris, Washington, Moscow -- Israel builds in Jerusalem," Netanyahu said. "Our bond to our capital is no less ancient and powerful."

The interior ministry on Thursday gave final approval for plans to build 797 homes in Gilo, a settlement neighbourhood in the southern flanks of east Jerusalem on land seized during the 1967 Middle East war and later annexed in a move not recognised by the international community.

It sparked criticism from EU foreign policy chief Catherine Ashton who said she "deeply regrets" the decision.

"Settlements are illegal under international law and threaten to make a two-state solution impossible," a statement said.

Israel says Jerusalem is its "eternal, indivisible" capital, and does not view construction in the east as settlement activity. But the Palestinians want east Jerusalem as capital of their future state and fiercely oppose any extension of Israeli control there.

But Jerusalem Mayor Nir Barkat said he "completely rejected" the EU's remarks on Gilo, saying the neighbourhood was "an inseparable part of Jerusalem and we have no intention of apologising for that," in a statement issued late Saturday.

"We will continue to build tens of thousands of apartments throughout the city and for all sectors" of the public.

Foreign Minister Avigdor Lieberman also lashed out at the EU, saying "such automatic condemnations betrayed a lack of basic understanding of the reality in the region."

"The Gilo neighbourhood is an inseparable part of Jerusalem, and Jerusalem an unseparable part of Israel," he said.

Such condemnations, he said, "only encourage the Palestinians to continue refusing negotiations and continue anti-Israel actions in the international arena" -- a reference to Palestinian attempts to seek upgraded UN status.

"The EU should better focus on the problems emerging between peoples and nations on European soil, and after their successful resolution, we would be happy to hear proposals regarding solving the problems with the Palestinians," he said.