JERUSALEM — Israeli Prime Minister Benjamin Netanyahu said on Wednesday his government would press ahead with expanding Jewish settlements around Jerusalem despite Western criticism of its plan to build 6,000 more homes in territory Palestinians seek for a state.

His comments came as the United Nations called on Israel to cancel plans to build thousands of new settler homes in the occupied Palestinian territories, warning it could be "an almost fatal blow" to peace hopes.

U.N. leader Ban Ki-moon's political chief also told the Security Council that Israel must resume the transfer of frozen tax and customs money to the struggling Palestinian Authority "without delay."

In addition to several thousand housing units approved earlier this month, Israeli media said initial approval was granted on Wednesday for construction of another 3,400 units in Jerusalem and in the West Bank.

Israel captured east Jerusalem in a 1967 war and annexed it as part of its capital in a move never recognised internationally. Palestinians want the area to be capital of a state they seek to establish in the West Bank and the Gaza Strip, land also captured by Israel.

"We are going to build in Jerusalem for all its residents, this is something that has been done by all previous governments and this is something that my government will continue to do," Netanyahu said in a meeting with foreign ambassadors.

"Jerusalem has been the capital of the Jewish people for 3,000 years," Netanyahu said, "Imagine that you would limit construction in your own capital, it doesn't make sense."

Netanyahu launched his latest settlement expansion push after Palestinians won de facto recognition as a state in a United Nations vote last month.

Israeli analysts see the settlement drive also as an effort by Netanyahu to enhance support for his right-wing Likud party against other hawkish rivals in a Jan. 22 parliamentary election he is expected to win.

Most world powers deem Israeli settlements illegal and say they are an obstacle to peace. The Palestinians say Israeli settlements in East Jerusalem and the West Bank will deny them a viable state.

The United States and Europe have strongly condemned Israel's latest building plans, and Israeli ambassadors were summoned earlier this month for a reprimand in at least half a dozen European capitals.

State Department spokeswoman Victoria Nuland said this week that Washington was "deeply disappointed that Israel insists on continuing this pattern of provocative action."

Nuland said settlement expansion put the goal of achieving a two-state solution already delayed by peace talks being stalled for two years, "further at risk."

Nimr Hammad, a spokesman for President Mahmoud Abbas told Palestinian radio the Palestinians may protest "to the [U.N.] Security Council and seek a resolution there" against Israel's latest settlement plans.

AFP Contributed to This Report