Israel Prime Minister Benjamin Netanyahu vowed today to continue building in east Jerusalem.
European Union foreign policy chief Catherine Ashton had criticised plans to build nearly 800 new flats and a military college in the city.
She said on Friday that she "deeply regrets" Israel's decision to build in Gilo, which is beyond the 1967 Green Line.
Ms Ashton stated: "Settlements are illegal under international law and threaten to make a two-state solution impossible."
She added that Israel's expansion of settlements "continues the process of separating east Jerusalem from the rest of the occupied Palestinian territory."
Jerusalem mayor Nir Barkat retorted: "Gilo is an inseparable part of Jerusalem and we are not going to apologise. We will continue to build tens of thousands of apartments across the entire city."
And Mr Netanyahu told his cabinet: "We are not imposing any restrictions on construction in Jerusalem. It is our capital."
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