"Such is the case in Beitar Illit," he told army radio.

Peace obstacle

Israel's continued expansion of settlements is one of the biggest obstacles to the resumption of peace talks with the Palestinians, now suspended for more than a year despite months of US-led shuttle diplomacy.

The Israeli anti-settlement group Peace Now slammed the new project, saying it would "widen the gap with the Palestinians and the two-state solution, which risks becoming obsolete."

The new project came to light a day after the Palestinians grudgingly agreed to four months of indirect peace negotiations with Israel but warned that the US-brokered process would collapse if it continued expanding settlements.

It also came as Biden was to make his first visit to the region since assuming office. George Mitchell, the US Middle East envoy, is also in the region on the latest of several visits to meet Israeli and Palestinian leaders.

The Palestinians insist they will only return to direct talks if Israel agrees to a complete freeze on settlement construction in the  occupied West Bank, including annexed Arab east Jerusalem.

Moratorium

The United States initially backed that demand, but has since called on both sides to immediately return to negotiations while routinely criticising Israeli settlement activity in line with longstanding policy.

Erdan played down the chances of a strong US reaction to the latest settlement boost and blamed the Palestinians for stalling peace efforts.

He said: "Secretary of State Hillary Clinton and Vice President Joe Biden know that the key is that the Prime Minister (Binyamin Netanyahu) is ready at any moment to engage in direct negotiations.

"However [Palestinian president] Mahmoud Abbas wants to limit the indirect negotiations to four months after months of setting unprecedented conditions for accepting dialogue, and this is not the way to discuss peace."

Israel announced a 10-month moratorium on new building permits for settler homes in the occupied West Bank in November but it excludes east Jerusalem, public buildings and works already under way.

Around a half million Israelis live in more than 120 settlements scattered across the occupied West Bank, including east Jerusalem. The international community considers all settlements illegal.