In the midst of a high-profile visit by U.S. Vice-President Joe Biden, Israel unveiled plans for new housing in disputed Jerusalem, a surprise step that embarrassed and angered the highest-ranking Obama administration official yet to visit the country.

Biden, who had come to promote new peace talks and to smooth the Obama administration's strained relations with a longtime ally, instead denounced Israel's plans to build 1,600 new housing units in East Jerusalem as a threat to the search for peace.

"I condemn the decision by the government of Israel to advance planning for new housing units in East Jerusalem," Biden said yesterday, calling it "precisely the kind of step that undermines the trust we need right now."

"We must build an atmosphere to support negotiations, not complicate them," he added.

The sharp turn of events abruptly changed the tenor of the trip in its second day, coming just hours after he proclaimed his love for Israel and declared enduring American support.

Biden's visit followed a year of tension brought on by Israel's defiance of the Obama administration's admonitions on precisely the same issue: housing settlements in disputed areas.

In Washington, the White House added its own criticism. But it was unclear how deeply the latest step by Israel would affect ties between the two countries, which have been strained by tensions over the Jewish state's hardline security measures.

Aides said Biden raised the issue with Israeli Prime Minister Benjamin Netanyahu at a dinner given in honour of the vice-president's visit. U.S. officials have repeatedly warned Israel that such development in Jerusalem would anger Palestinians and further threaten prospects for peace.

Biden is to deliver a major address on U.S.-Israeli relations tomorrow. He will also meet with Palestinian and Jordanian officials.

However, Israelis sought to downplay any relation between yesterday's announcement and Biden's visit, saying the housing plans have been years in the making and that Netanyahu, who appeared in public with Biden only hours earlier, had no idea if they were being unveiled.

Nonetheless, the plans by the Israel Interior Ministry to build the 1,600 homes for Israelis in the Ramat-Schlomo neighbourhood of Jerusalem cast a dark shadow over Biden's visit, which was aimed at strengthening frayed ties between the two allies.

Palestinian leaders consider such housing moves a threat to their future presence in a city they hope will someday be their capital, and the announcement brought quick protests. Palestinian officials said the announcement was timed to Biden's visit and called for a strong U.S. response.

A spokesman for Palestinian President Mahmoud Abbas described the Israeli move as "dangerous" and said it would "torpedo negotiations and the American effort even before they start."

The housing announcement caught even many Israelis by surprise, in part because the neighbourhood, home to many young couples, had not been among those previously earmarked for expansion. Ramat-Shlomo is in an orthodox neighbourhood located on land seized by Israel after the 1967 war.

"It's totally out of the blue," said Hagit Ofram, spokeswoman for Peace Now, who tracks Israeli settlements.

She said the project came up for initial review at a planning meeting yesterday, and still faces several hurdles before approval. Construction may not begin for two years, she said.

"But politically, it means there is an intention to expand there."