JERUSALEM, Nov. 18, 2009  -- There is new friction between the Obama administration and the Israeli government of Prime Minister Netanyahu, once again concerning Israeli settlements.

Ignoring the wishes of the United States, Israel Tuesday greenlighted the construction of 900 new homes in Gilo on the outskirts of Jerusalem. The United States considers the area occupied land and, as such, considers it a settlement.

President Barack Obama's ambitious plans to kick-start Middle East peace have been stymied for months by Israel's refusal to implement a construction freeze in the settlements, and the Palestinians' refusal to talk without such a freeze.

"We are dismayed at the decision to move forward on the approval process for the expansion of Gilo," White House spokesman Robert Gibbs said Tuesday evening.

The office of the U.N. Secretary General Ban Ki-moon was quick to issue a statement, saying the Israeli move threatened to "undermine efforts for peace and cast doubt on the viability of the two-state solution."

The Israeli government has offered to restrain settlement construction but only in the West Bank, and confirmed today that it does not consider Gilo to be a settlement.

Netanyahu's spokesman Mark Regev said the prime minister was "willing to adopt a policy of restraint concerning growth in the West Bank, but this applies to the West Bank. Jerusalem is Israel's capital and will remain as such."

Netanyahu has been consistent in his refusal to apply any limit on settlement building in Jerusalem. Such a stand has upset the Palestinians and the wider Arab world, which wants to create the future capital of the Palestinian state in the eastern section of the holy city.

But most Israelis today agree with their right-wing prime minister and insist that Gilo and other large areas of Israeli housing on occupied land are not settlements and must remain part of Israel forever.

After the 1967 Six-Day War, Israel occupied east Jerusalem and the West Bank, ending almost two decades of Jordanian rule. The municipal boundaries of Jerusalem were unilaterally redrawn to greatly increase the city's territorial footprint. The new boundaries have never been recognized outside Israel.

Palestinians Want to Declare Themselves Independent

The timing of the latest construction plan is likely to upset the U.S. administration's efforts to persuade the Palestinian President Mahmoud Abbas to come back to the talks.

Since Israel's refusal to stop building, the Palestinians have been threatening to go forward on their own and declare their statehood without negotiation.

The threats have alarmed both Israel and the United States and the plans to expand Gilo are unlikely to improve the already sour atmosphere.