JERUSALEM -- The City Council on Monday approved a divisive redevelopment plan to demolish 22 Palestinian homes in Arab-dominated East Jerusalem, potentially reigniting a debate over Israeli construction on land it seized in 1967.

The approval threatens to renew friction between Israel and the Obama administration just as the former is battling a surge of international pressure over its policies in the Gaza Strip.

President Barack Obama has repeatedly asked Israel to refrain from building new projects in Arab-dominated neighborhoods of East Jerusalem, warning against any "provocations" that might derail U.S.-brokered Israeli-Palestinian peace talks. So-called proximity talks, in which the United States serves as a go-between, began last month.

"We are urging all sides to refrain from any unilateral actions that seem to prejudice the outcome of final-status" peace talks, said U.S. Embassy spokesman Kurt Hoyer. "Jerusalem is a final-status issue."

A spokesman for Israeli Prime Minister Benjamin Netanyahu downplayed the Jerusalem council's decision, expressing hope that Palestinian opposition to the project could be overcome. "This is a preliminary planning process that leaves more than enough time to continue with the dialogue between the municipality and local residents," spokesman Mark Regev said.

Officials of the Palestinian Authority, which hopes one day to make East Jerusalem the capital of a Palestinian state, condemned Monday's approval as "unacceptable." Spokesman Ghassan Khatib said: "I believe this decision is bound to have an impact on the proximity talks."

Palestinian negotiators previously threatened to walk away from talks if Israel kept building in disputed parts of Jerusalem.

Palestinian residents and activists, who protested the City Council meeting Monday, called the project the latest example of Israel's "fast-track Judaization" of East Jerusalem. They said the city ignored an alternate plan they had proposed that would have avoided house demolitions.

The development project, to be built in the Silwan neighborhood, was first proposed last year by Jerusalem Mayor Nir Barkat. It would raze 22 Arab homes, which were built over the last 20 years without permits, to make way for an archaeological park for tourists and a retail shopping center.

Mr. Barkat has said the project, called King's Garden, is an important step toward rehabilitating Jerusalem and dealing with the hundreds of illegally built homes in Palestinian neighborhoods.

The approval -- the start of what is likely a multistage, multiyear review process -- comes at a sensitive time. Besides international scrutiny over Israel's raid of a Gaza-bound aid ship last month, which left nine activists dead, Mr. Netanyahu is slated to meet July 6 with Mr. Obama in the United States.

The two have sought to mend their relationship since a public standoff this spring over U.S. demands that Israel halt housing construction on land it seized in the 1967 Middle East War, including parts of Jerusalem.

The dispute came to a head during Vice President Joseph R. Biden's Israel visit in March, when the Housing Ministry announced building approval for 1,600 new units for Jewish families across the Green Line that once separated the West Bank and East Jerusalem from Israel.

The spat settled when Israelis and Palestinians agreed to resume proximity talks. Though Mr. Netanyahu never publicly agreed to a Jerusalem construction freeze, no major projects have been approved since then.