Israel has announced plans to build 1,500 new homes in occupied East Jerusalem, the part of the city claimed by the Palestinians, just hours after it freed 26 Palestinian prisoners as part of a deal to set peace talks in motion.

Interior Ministry Spokeswoman, Lital Apter, said Israel also plans to build an archaeology and tourism site near the Old City, home to Jerusalem's most sensitive holy sites.

Israel first announced the development plans in 2010 during US Vice President Joe Biden's visit to Israel, sparking a diplomatic rift with Washington that took months to mend.

The latest move is seen by some as an attempt by Prime Minister Benjamin Netanyahu to make up for the prisoner release, for which he has been sharply criticised within Israel.

The prisoners have been jailed on charges ranging from throwing rocks to killing Israelis in bombings and gun attacks. There are roughly 5,000 Palestinian prisoners lodged in Israeli jails.

Plans to build the homes in the city's Arab sector emerged in Israeli media almost immediately after Israel began freeing 21 prisoners to the West Bank and another five to the Hamas-run Gaza Strip overnight.

The move is seen as an attempt by Netanyahu to make up for the recent prisoner release [Reuters]

Israel has a long history of lopsided prisoner exchanges with its Palestinian counterpart. This week's release of 26 prisoners appeared especially charged because Israel seemed to be getting little in return except an opportunity to conduct negotiations.

Palestinian anger

Palestinian President Mahmud Abbas's spokesman, Nabil Abu Rudeina, said the settlement plan "destroys the peace process and is a message to the international community that Israel is a country that does not respect international law".

Under a deal brokered by US Secretary of State John Kerry, the Palestinians agreed to resume talks in late July after Israel agreed to the release of the longest-serving Palestinian prisoners. In all, 104 Palestinian convicts are to be released in four rounds over the coming months.

The Palestinians have long refused to resume peace negotiations with Israel unless it ends settlement construction in the occupied West Bank and East Jerusalem.

Settlement building in the territories occupied by Israel during the 1967 Six Day War is considered illegal under international law, and the issue remains one of the most divisive in the decades-old conflict.

Israel has refused, insisting that settlements and other core issues, including security, should be resolved through negotiations.

Israeli anti-settlement group, Peace Now, said last week that housing starts in West Bank settlement are up by 70 percent this year.

It said there were 1,708 housing starts in January-June this year, compared with 995 during the same period in 2012.

Palestinians want the West Bank and East Jerusalem and the Gaza Strip for a future country but fear that more settlement building will deny them a viable state.

Source: Agencies