The planned construction is on lands that Israel captured as part of its victory in the 1967 Arab-Israeli war. The Jewish state later formally annexed East Jerusalem in a move that was not recognized by the international community.

The Israeli Prime Minister's office is not commenting on the plans for expansion, but a statement on Tuesday said construction in the East Jerusalem neighborhood of Gilo is nothing new. It said Gilo is an integral part of Jerusalem and that building in the neighborhood has continued unabated for decades.

On Wednesday, President Abbas' spokesman, Abu Rudeineh welcomed President Obama's criticism of the plans for new construction in Gilo. However, he said Washington needs to go further and toughen its stance or risk ruining the peace process.

"The Americans should take seriously what is going on," he added. "The whole situation is deteriorating. The Americans this time should change their policy, the change which we have been promised by President Obama."

President Obama, in his speech to the Muslim world in June, called for Israel to stop settlement expansion in the West Bank and allow for the establishment of a Palestinian State.

Washington, however, angered the Palestinians this month when Secretary of State Hillary Clinton praised what she said were Israel's concessions for peace.

Israel has offered to restrain construction on settlements in the West Bank, but has made no offers regarding construction in East Jerusalem.