ISRAEL faces international condemnation over plans to expand settlement construction in occupied territory in the West Bank, with Britain and France reportedly considering recalling their ambassadors.
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 cut off East Jerusalem from the rest of the West Bank, he said.
"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In the interests of peace, any plans for E-1 must be rescinded, he said.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 decision 24 hours after a vote in the UN General Assembly upgraded Palestine's status to a non-member observer state.
The expansion in settlement construction was widely seen as punishment for the Palestinians' decision to go to the UN.
Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz said on Sunday they would withhold taxation payments Israel collected on behalf of the Palestinian Authority in November - NIS460 million ($115 million) - and to use it to pay off the PA's debt to the Israel Electric Corporation, believed to be NIS700 million.
"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," Mr Netanyahu said. He said the PA's one-sided step at the UN was a gross violation of agreements that had been signed with Israel.
London was furious about the E-1 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, it reported.
A senior spokesman for Israel's Ministry of Foreign Affairs, Paul Hirschson, said Israel had not been told 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 have not told us about it."
Thousands turned out in the West Bank city of Ramallah to welcome home PA President Mahmoud Abbas on his return from New York.