Israel has announced the construction of 1,500 new settler homes in the occupied East Jerusalem illegal settlement of Ramat Shlomo, Israeli army radio said.

The early-morning report, credited to prime minister Binyamin Netanyahu and his interior minister, Gideon Saar, came hours after Israel freed 26 veteran Palestinian prisoners as part of a deal for US-brokered peace talks.

Last week, an Israeli official said new tenders were to be announced in the large illegal settlement blocs and in occupied East Jerusalem "in the coming months" as part of "understandings" reached with the Palestinians and Washington.

The Palestinians, who view continued illegal settlement construction as a major obstacle to peace, said ther was no such agreement.

In August, Israel announced plans for more than 2,000 new illegal settler homes in tandem with the first prisoner release, angering the Palestinians.

In March 2010, Israel sparked the ire of the US administration by announcing, during a visit by Vice President Joe Biden, that 1,600 new illegal settler homes would be built in Ramat Shlomo.

Israel captured East Jerusalem during the 1967 Six Day War and then occupied it in a move never recognised by the international community.

The radio said that Netanyahu and Saar also agree to push ahead with two other East Jerusalem projects; an archaeological and tourist centre just outside the Old City walls and a national park on the slopes of Mount Scopus.