Israel on Tuesday rebuffed criticism by the United States and Europe that building plans for disputed Jerusalem neighborhoods might hamper efforts to reignite stalled peace talks with the Palestinians.

"Jerusalem is not a settlement. It is the capital of the State of Israel," the Israeli Prime Minister's Office said in a statement, one of a flurry of words between Israel and the Obama administration over construction plans for three neighborhoods.

"Israel has never accepted upon itself restrictions of any kind on construction in Jerusalem, which has approximately 800,000 residents, including during the ten months in which construction was suspended in Judea and Samaria (the biblical term for the West Bank)," the statement read.

Earlier Tuesday, U.S. President Barack Obama cautioned that plans to construct upward of 1,300 new housing units are counterproductive to efforts to restart the stalled peace talks, which reached an impasse in September.

"This kind of activity is never helpful when it comes to peace negotiations. Such incremental steps can end up breaking down trust between the parties," Obama said in a press conference held during a trip to Indonesia, adding that he was concerned both sides were not "making the kind of effort required to achieve a breakthrough" in the peace talks, which "could finally create a framework for a secure Israel living side by side in peace with a sovereign Palestine."

Top U.S. officials were reportedly outraged on Monday, when news poured in that the Jerusalem District Planning and Building Committee -- directly supervised by Israel's Interior Ministry -- published details of the planned sites, additions to existing neighborhoods gained after the 1967 war.

Jerusalem's status has been a core issue in all negotiations held by Israel and the Palestinian National Authority since the mid-1990s. The Palestinians claim the city's eastern side as the capital of their future state. Israel insists that those areas will remain under its sovereignty.

The announcement came shortly after Netanyahu met U.S. Vice President Joe Biden in New Orleans, where both men addressed the annual Jewish Federations of North America General Assembly.

Biden was notified of the plan as he was addressing a crowd of hundreds of Jewish leaders, reiterating America's commitment to Israel's security and the need to counter the threat posed by Iran's nuclear ambitions.

Tuesday's exchange of contentious statements was not the first time that a diplomatic incident followed the publishing of controversial construction plans in East Jerusalem.

In March, a scandal erupted during Biden's visit to Israel, when a plan to build 1,600 new homes was announced, embarrassing both Biden and Netanyahu.

Since then, Netanyahu had reportedly imposed guidelines meant to prevent similar crises with the U.S. administration.

Israeli officials said Tuesday they were "astonished" by the timing of the plan's announcement, while Netanyahu is touring the United States and meeting with top officials.

But the statement issued Tuesday by Netanyahu's office defended Israel's right to build in Jerusalem, underlining that it has no bearing on ongoing efforts to resume the peace talks.

"Israel sees no connection between the diplomatic process and planning and building policy in Jerusalem, which has not changed in 40 years. During this period, peace agreements were signed with Egypt and Jordan, and for 17 years, diplomatic negotiations have been conducted with the Palestinians," the statement said.

It continued, "These are historical facts. Construction in Jerusalem has never hindered the peace process. The disagreements with the U.S. over Jerusalem are well-known. They are not new and have continued for 40 years. We hope to overcome them and continue to advance the diplomatic negotiations."

Washington, infuriated by the statement, responded immediately to the Israeli charges. State Department spokesman Philip Crowley said "there clearly is a link in the sense that it is incumbent upon both parties. They are responsible for creating conditions for a successful negotiation."

Stressing that the announcement of the new construction plan will influence the Palestinian position, Crowley said the U.S. understands that Israel has its own point of view, but "such announcements, at this time, contradict our efforts to bring the parties to direct negotiations."

The European Union earlier Tuesday added its criticism of the plan to build new homes in East Jerusalem, urging Israel to reconsider it.

"This plan contradicts the efforts by the international community to resume direct negotiations and the decision should be reversed," EU foreign policy chief Catherine Ashton said in a statement.

"Settlements are illegal under international law, constitute an obstacle to peace and threaten to make a two-state solution impossible," she added.

Obama toned down his critique of Israel on Wednesday, saying that the U.S. "will spare no effort to achieve a just outcome" in talks between Israelis and Palestinians.

He also said that while both sides restarted direct talks, the Middle East peace process still faces "enormous obstacles," adding that it is within the interest of all parties involved to achieve "two states, Israel and Palestine, living side by side in peace and security."