ISRAEL has sought to play down a growing international furore over proposals to build more Jewish settlements in the West Bank and Jerusalem.
The US and several European nations have censured the approval of 3000 additional homes on land where they consider Israeli construction to be illegal.
The plan was announced less than 24 hours after Palestine was recognised as a non-member state by the United Nations General Assembly, with the US and Israel among those voting against.
"Criticism between friends is legitimate," Israeli Finance Minister Yuval Steinitz said at a Jerusalem press briefing.
"Our friends do understand, even if they have to say they don't agree with us - and maybe they really don't agree to one or another step - that it's natural that there is an Israeli response."
Israel's decision includes preliminary steps towards building more Jewish housing in an area known as E-1 between Jerusalem and the West Bank settlement of Maaleh Adumim. The US and Europe have pressed Israel for years not to proceed with development there, because it would split northern and southern areas of the West Bank and may cut Palestinians off from east Jerusalem, which they seek as their state's capital.
Mahmoud Abbas, president of the Palestinian Authority, denounced the construction plan at his office in Ramallah, telling reporters: "If Israel continues with its settlements, it definitely doesn't want a peace agreement."
His envoy to the UN called for international condemnation of Israel's actions in letters sent to Secretary-General Ban Ki-moon and to the presidents of the Security Council and General Assembly.
Building in the E-1 area "would be especially damaging to efforts to achieve a two-state solution", State Department spokesman Mark Toner said in a statement. White House spokesman Jay Carney called the plan "counterproductive".
The British and French governments lodged sharper protests, formally summoning Israeli ambassadors to express their concerns. Australia followed suit.
Germany, where Israeli Premier Benjamin Netanyahu is due to travel, and Brazil were among other countries lodging protests.
Mr Netanyahu's office said on Tuesday that Israel would continue with its settlement plans "even in the face of international pressure".
Deputy Foreign Minister Danny Ayalon told Army Radio that during talks in Germany and the Czech Republic, "we will hold discussions and explain and sometimes agree to disagree".
The Jerusalem District Planning Committee is planning to hold a scheduled hearing in two weeks on another housing project approved for Ramat Shlomo, an area of the city seized by Israel in the 1967 Middle East war and also claimed by Palestinians. US Vice-President Joe Biden criticised that plan when it was announced two years ago while he was visiting Jerusalem.
Israel's shekel rebounded on Wednesday, recouping the loss it posted on Tuesday on concern that the settlement dispute may hurt the economy.
The currency rose 0.3 per cent to 3.8154 per US dollar in Tel Aviv. Exports comprise about 40 per cent of the Israeli economy's output, and Europe is one of its largest markets.
"I'm sure the excellent economic co-operation between Israel and Europe, and Israel and the US, won't be harmed" by the settlements dispute, Mr Steinitz said.