Jerusalem (CNN) -- President Barack Obama's disappointment over Israel's plans for new housing in east Jerusalem has drawn criticism from the prime minister's office and the country's settler council.
Appearing before reporters in Indonesia on the second leg of his Asian trip, Obama was asked whether "Israel's advanced planning for more than a thousand new homes in Jerusalem" undermines his peace efforts and trust between Israelis and Palestinians.
"I've been out of town, so I'm just seeing the press reports. I have not had a full briefing on Israel's intentions and what they've communicated to our administration," Obama said.
"But this kind of activity is never helpful when it comes to peace negotiations. And I'm concerned that we're not seeing each side make the extra effort involved to get a breakthrough that could finally create a framework for a secure Israel living side and side in peace with a sovereign Palestine," he said.
"We're going to keep on working on it, though, because it is in the world's interest, it is in the interest of the people of Israel, and it is in the interest of the Palestinian people to achieve ... that agreement. But each of these incremental steps can end up breaking down trust between the parties."
The Israeli government said Monday it is proceeding with plans for about 1,000 new housing units in east Jerusalem, a move that the chief Palestinian negotiator said would derail already suspended peace talks.
Construction of settlements in the West Bank, as well as new housing in Jerusalem, have been criticized by the Palestinians, and such activity has been a stumbling block in the direct negotiations renewed by the Obama administration.
Israel seized east Jerusalem in the 1967 Six Day War, annexed the ancient city, and established the nation's capital there. The international community, however, does not recognize Jerusalem as Israel's capital, and embassies in the country have based themselves in Tel Aviv. Palestinians envision the eastern part of the city as its future capital in a two-state solution.
Israel differentiates the settlements from the West Bank, the land seized from Jordan in the 1967 war, from the housing in the politically undivided city of Jerusalem.
Prime Minister Benjamin Netanyahu's office said Jerusalem "is not a settlement." The city, it said, is the "capital of the state of Israel."
"Israel has never restricted itself regarding any building in Jerusalem," his office said, and that includes the 10-month moratorium on construction in the West Bank that ended in late September.
The issue of settlement construction has been the first major obstacle of direct Israeli-Palestinian peace talks resumed in August. The talks were suspended in September when Israel refused to extend the moratorium on settlement construction in the West Bank.
"Israel sees no connection between the peace process and its planning and building policy in Jerusalem, which has not changed over the past 40 years. All of the Israeli governments in the past 40 years have built in all parts of the city,"
The office said that during the period when Israel signed peace treaties with Egypt and Jordan and negotiated with Palestinians, building in Jerusalem hadn't obstructed the peace process
Netanyahu's office said the disagreements between United States and Israel over Jerusalem "are not a new thing and they have existed for 40 years."
"We hope to overcome them and continue to make progress in negotiations for peace. PM Benjamin Netanyahu is looking forward for his planned meeting with the Secretary of State [Hillary] Clinton on Thursday in order to promote the peace talks."
The Yesha Council, which represents the settlements in the West Bank, said Obama's statements show he's "out of touch with the reality of the facts on the ground."
"Jerusalem will remain the capital of Israel and it must remain undivided," said Yesha Council Chairman Danny Dayan. "This is the ultimate hypocrisy to say one thing in an election campaign and to take the opposite position in reality."
"The people of Israel have every right, both legal and moral, to build for the needs of our families and the future of our nation in our undivided capital," he said. "These continued pronouncements by an American president so critical of the only democracy in the Middle East only serve to further damage the historically strong relations between our two countries."
Efrat Orbach, spokeswoman for Israel's Interior Ministry, told CNN that the ministry had published details for permits for the new units in the neighborhoods of Har Homa and Ramot. Both areas lie on the side of the Green Line generally considered part of east Jerusalem.
Orbach said the units had been approved six months ago and last week's publication of details for the housing permits was advertised to allow the public to register any opposition to the construction.
Saeb Erakat, the chief Palestinian negotiator, told CNN that Monday's announcement shows Israel is committed to the settlements at the cost of a possible peace agreement.