Jerusalem: Israel is facing international condemnation over its plans to significantly expand settlement construction in occupied territory in the West Bank, with Britain and France reportedly considering recalling their ambassadors over the decision.
The UN Secretary-General Ban Ki-Moon expressed "grave concern and disappointment" over Israel's announcement of 3000 new settlement units in East Jerusalem and other parts of the West Bank including an area known as E-1, which could "completely" cut off East Jerusalem from the rest of the West Bank, he warned.
"Settlements are illegal under international law and, should the E-1 settlement be constructed, it would represent an almost fatal blow to remaining chances of securing a two-state solution," Mr Ban said.
In the interests of peace, any plans for E-1 must be rescinded, he said.
The Israeli Government announced its controversial decision just 24 hours after a vote in the United Nations General Assembly upgraded Palestine's status to "non-member observer state."
The 193-member assembly voted overwhelmingly in favour, with 138 countries supporting the resolution, nine against and 41 abstentions, including Australia.
The scale of the defeat was viewed by some in Israel as a diplomatic humiliation, and the expansion in settlement construction was widely seen as punishment for the Palestinians' decision to go to the UN.
Prime Minister Benjamin Netanyahu and his Finance Minister Yuval Steinitz also revealed on Sunday they will withhold the taxation payments Israel collects on behalf of the Palestinian Authority in November - a total of NIS 460 million ($115 million) - and to use it towards the PA's debt to the Israel Electric Corporation, believed to be NIS 700 million.
Mr Netanyahu was unrepentant over his cabinet's decision to continue building in the contested area, saying: "we are building and we will continue to build in Jerusalem and in all areas that are on the map of the strategic interests of the State of Israel."
The Palestinian Authority's one-sided step at the UN constitutes a gross violation of the agreements that have been signed with the State of Israel, Mr Netanyahu said.
"London is furious about the E1 decision," a European diplomat told the newspaper Haaretz.
According to senior EU diplomats, Britain and France were discussing the extraordinary step of recalling their ambassadors from Tel Aviv for consultations, Haaretz reported.
However a senior spokesman for Israel's Ministry of Foreign Affairs, Paul Hirschson, said Israel had not been informed of any diplomatic protests.
"At no point have the British, the French or anyone else told us they are considering withdrawing their ambassadors for consultation — they may have considered it but ... they have not told us about it," he said.
"We have the right to build — legitimate and legal — wherever we want. And so do the Palestinians," as long as it is in line with the Oslo Agreements, he said.
Israel's actions did little to dampen the celebrations over the successful bid in the United Nations, with thousands turning out in the West Bank city of Ramallah to greet Palestinian President Mahmoud Abbas, who returned home from New York.
"Now we have become a state," President Abbas told the cheering crowd.