Just one day after a landmark UN vote recognising Palestine as a non-member observer state, Israel has moved to authorise the construction of 3,000 new homes in East Jerusalem and the West Bank.

The move, which has drawn widespread criticism, including from Australia and stalwart Israel ally the United States, is seen as punishment for the United Nations General Assembly vote.

A US State Department official says both the vote and the settlement expansion are counterproductive to reaching a peace settlement and a two-state solution.

State Department spokesman Tommy Vietor says Washington wants to be even-handed in its condemnation.

"We reiterate our longstanding opposition to settlements and East Jerusalem construction and announcements," he said.

"We believe these actions are counterproductive and make it harder to resume direct negotiations or achieve a two-state solution.

"Direct negotiations remain our goal and we encourage all parties to take steps to make that easier to achieve."

Australia's Foreign Minister Bob Carr has also condemned Israel's announcement of more housing in the disputed territory.

"The spread of settlements simply makes a two-state solution all the more difficult," he said.

"It complicates enormously the task of eventually creating a Palestinian state without which there will never be security in Israel. A Palestinian state is indispensable to the security of Israel."

Mr Vietor says the administration will continue to try to convince US politicians to release nearly $500 million worth of aid still blocked by Congress.

Media reports said some construction would be in a highly contentious area of the West Bank known as E1, a corridor that runs between the eastern-most edge of annexed East Jerusalem and the Maaleh Adumim settlement.

If the construction goes ahead it will make it impossible to connect the Palestinian cities of Ramallah and Bethlehem to the Palestinian neighbourhoods of East Jerusalem.

Palestinians want East Jerusalem as their capital in any two-state solution.

Israeli prime minister Benjamin Netanyahu warned that by going to the UN the Palestinians had "violated" previous agreements with Israel, such as the 1993 Oslo Accords, and that his country would "act accordingly".

A senior official from the Palestinian Liberation Organisation decried the move as an act of aggression, calling on the international community to act.

"It is an act of Israeli aggression against a state, and the world needs to take up its responsibilities," official Hanan Ashrawi said.

"What was announced today is just part of a comprehensive settlement plan."

Historic vote

The historic vote in New York on Friday morning was carried by 138 votes to nine, with 41 countries, including Australia, abstaining.

The resolution lifts the Palestinian Authority's UN observer status from "entity" to "non-member state", the same status enjoyed by the Vatican.

Palestinians see the move as an important step in the peace process while the Israelis, supported by the United States, say it will only inflame tensions.

A major concern for the US is that the Palestinians could use their new status to join the International Criminal Court and pursue possible war crimes charges against Israel.

Foreign Affairs Minister Bob Carr said that by abstaining from the vote, Australia sent a strong signal to Israel that they must negotiate.

He added the overwhelming support for the motion showed the world was growing impatient.

"[The vote was] a striking confirmation that world opinion is growing impatient and wants the two sides to negotiate a two-state solution, and, as well, wants to offer the Palestinian people - the moderates in West Bank in particular - some promise and some hope," he said.

News of the vote sparked celebrations in Gaza and the West Bank, where the Palestinian Authority has its headquarters.

Earlier, Palestinian president Mahmoud Abbas urged UN members to "issue a birth certificate" for a state of Palestine as he opened the debate in the General Assembly.

"Palestine comes today to the United Nations General Assembly at a time when it is still tending to its wounds and still burying its beloved martyrs of children - women and men - who have fallen victim to the latest Israeli aggression," Mr Abbas said, in reference to the recent Israeli assault on Gaza.

"Palestine comes today to the General Assembly because it believes in peace and because its people, as proven in past days, are in desperate need of it.

"Palestine comes today to this prestigious international forum, representative and protector of international legitimacy, reaffirming our conviction that the international community now stands before the last chance to save the two-state solution."

ABC/Reuters/AFP