The forum of top eight ministers on Tuesday concluded its meeting on Israel's response to the accession of the Palestinian Authority into UNESCO.
Following the meeting, Prime Minister Benjamin Netanyahu instructed the government to expedite the construction of some 2,000 housing units in Jerusalem, Gush Etzion and Ma'ale Adumim – all areas that he said would remain within Israel's territory as part of any future arrangement with the Palestinians.
A senior government official told Ynet on Monday that "Israel might respond to the Palestinians' unilateral move with specific steps, which may not seem problematic to Israel, but might prompt international objections.
"What happened in UNESCO is not a simple matter, and must be taken seriously," a Jerusalem official told Ynet. "Israel might respond with its own unilateral steps, and must examine the ramifications of the Palestinian accession."
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The European Union expressed deep concern about Israel's decision.
"I am deeply concerned by the latest Israeli decisions," EU foreign policy chief Catherine Ashton said in a statement, adding that settlement building was against international law.
"We call on Israel to reverse this decision and call on both sides to continue their engagement with the Quartet on advancing peace efforts."
British Foreign Secretary William Hague also condemned the announcement, calling it a serious blow to efforts to restart peace talks.
"This settlement building program is illegal under international law and is the latest in a series of provocative and unhelpful settlement announcements,We need to see steps towards peace, not actions that divide and isolate the parties further and undermine the prospects for negotiations."
White House spokesman Jay Carney said the Obama administration was "deeply disappointed" in the settlement decision.
"Unilateral actions work against efforts to resume direct negotiations, and they do not advance the goal of a reasonable and necessary agreement between the two parties," Carney said. "And that is the only way to achieve the two-state solution that both sides have as their goal."
Carney said that "any action that either side takes that makes it harder rather than easier for the two parties to come together in direct negotiations is something that we oppose, and that would be the case here."
