'We are working to create a climate in which negotiations can take place, and such actions make it harder to create such a climate.'

Netanyahu's plan is seen, however, as a way of calming opposition within his own Likud party, and among other hardliners, to a freeze of construction in Jewish settlements ahead of peace negotiations with Palestinians.

An Israeli official said that Israeli and US representatives are close to reaching a deal on a settlement freeze that would allow Obama to host a three-way summit, possibly at the United Nations Sep 23 or 24, and announce the relaunching of the peace process.

The sides hope to finalize the deal when Obama's special envoy to the Middle East, George Mitchell, visits the region next week.

Netanyahu's reported plan drew sharp criticism from the Palestinians. Palestinian President Mahmoud Abbas, in Paris to meet with French President Nicolas Sarkozy, called the expansion 'unacceptable'.