The Jerusalem City Council on Monday approved a divisive redevelopment plan to demolish 22 Palestinian homes in Arab-dominated East Jerusalem, potentially reigniting a debate over Israeli construction on land it seized in 1967.

The approval threatens to renew friction between Israel and the Obama administration just as the former is battling a surge of international pressure over its policies in the Gaza Strip.

Obama has repeatedly asked Israel to refrain from building new projects in Arab-dominated neighborhoods of East Jerusalem, warning against any “provocations” that might derail American-brokered Israeli-Palestinian peace talks. So-called proximity talks, in which the United States serves as a go-between, began last month.

In Washington, U.S. officials said they were unhappy with the decision, but they described it as preliminary and did not react strongly.

“This is expressly the kind of step that we think undermines trust that is fundamental to making progress in the proximity talks and ultimately in the direct negotiations,” State Department spokesman Philip Crowley said, while noting that the Jerusalem government had taken just an “initial step” in the project.

A spokesman for Israeli Prime Minister Benjamin Netanyahu downplayed the council’s decision, expressing hope that Palestinian opposition to the project could be overcome.

“This is a preliminary planning process that leaves more than enough time to continue with the dialogue between the municipality and local residents,” government spokesman Mark Regev said.

Officials from the Palestinian Authority, which hopes to one day make East Jerusalem the capital of a Palestinian state, condemned Monday’s approval as “unacceptable.”

“I believe this decision is bound to have an impact on the proximity talks,” said spokesman Ghassan Khatib. In the past, Palestinian negotiators have threatened to walk away from the talks if Israel continued building in disputed parts of Jerusalem.

Palestinian residents and activists, who protested the City Council meeting Monday, called the project the latest example of Israel’s “fast-track Judaization” of East Jerusalem. They said the city brushed aside an alternative plan they had proposed that would have avoided house demolitions.

The development project, to be built in the Silwan neighborhood, was first proposed last year by Jerusalem Mayor Nir Barkat. It would demolish 22 Arab homes, which were built over the last 20 years without permits, to make way for an archaeological park for tourists and a retail shopping center.

Barkat has said the project, called King’s Garden, is an important step toward rehabilitating Jerusalem and dealing with the hundreds of illegally built homes in Palestinian neighborhoods.

The approval, the beginning of what is likely a multistage, multiyear review process, comes at a sensitive time. In addition to international scrutiny over Israel’s raid of a Gaza-bound aid ship last month, which left nine activists dead, Netanyahu is scheduled to meet with Obama in the U.S. on July 6.

The two men have been working to mend their relationship since a very public standoff this spring over U.S. demands that Israel halt housing construction on land it seized during the 1967 Middle East War, including parts of Jerusalem.

The dispute came to a head during Vice President Joe Biden’s visit to Israel in March, during which the Housing Ministry announced the approval of 1,600 new units for Jewish families to be built across the so-called Green Line that once separated the West Bank and East Jerusalem from Israel.

The dispute eased when Israelis and Palestinians agreed to resume proximity talks. Though Netanyahu never publicly agreed to a construction freeze in Jerusalem, no major projects have been approved since then.

The upcoming White House meeting was supposed to be a chance to put tensions behind them.

In March, when Mayor Barkat first attempted to put the King’s Garden project up for review, Netanyahu pressured him to postpone the vote, fearing it would upset the United States. This time the prime minister did not attempt to intervene, according to one aide.

edmund.sanders@latimes.com

Times staff writer Paul Richter in Washington and special correspondent Maher Abukhater in Ramallah, West Bank, contributed to this report.