The Israeli daily Haaretz reported on Friday that the government had given the green light for 600 new homes in a Jewish settlement in east Jerusalem, drawing anger from the Palestinians.
"We have seen reports that plans for 600 housing units in Pisgat Ze'ev in east Jerusalem, originally deposited in 2008, have advanced in the approval process, although we understand that the total number of units has been reduced from the original plan," said Crowley.
"We also understand that this is not a final approval for the project, but it is a step in that direction."
Israel's continued expansion of settlements is one of the biggest obstacles to the resumption of peace talks with the Palestinians, now suspended for more than a year.
"The Palestinians insist they will only return to the negotiating table if Israel agrees to a complete freeze on settlement construction in the occupied West Bank, including east Jerusalem," said Crowley.
"We continue to urge both parties to refrain from unilateral actions that, whether intended to or not, undermine trust and efforts to resume negotiations that will bring an end to the conflict and result in a two-state solution.
"We believe it is of great importance that negotiations between Israel and the Palestinians resume as soon as possible."
Israel announced a 10-month moratorium on new building permits for settler homes in the occupied West Bank in late November but it excludes east Jerusalem.
Israel insists that the entire city is its "eternal, indivisible" capital, but the Palestinians are determined to make the city's eastern sector the capital of their promised state.
About 200,000 Jewish settlers live in east Jerusalem alongside 270,000 Palestinian residents.
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