JERUSALEM (Agencies) - Israel has approved the construction of almost 900 new homes in East Jerusalem, a move that enraged Palestinians who have demanded it as the capital of their promised state and could hinder international efforts to secure a peace deal by year's end. A spokesman for Israeli Housing Minister Zeev Boim said his office will issue a tender this week for the construction of 884 houses, 121 of them in Har Homa. The rest will be in Pisgat Zeev. Both are neighbourhoods annexed by Israel in 1967. The Housing Ministry said it timed the issuance of the permits to coincide with the 41st anniversary of the annexation. "These offers are being published for the occasion of Jerusalem Day, celebrating the 41st anniversary of the reunification of the city,"  Housing Ministry spokesman Eran Sidis told AFP, referring to Israel's occupation of east Jerusalem in the Six Day War. Jerusalem Mayor Uri Lupolianski defended the move, telling public radio it was necessary to address the "urgent need for housing for the Jewish population."Palestinians slammed the decision, saying it undermined peace efforts and reflected mounting Israeli doubts over the political future of Israeli Prime Minister Ehud Olmert, who is facing new corruption allegations. "We strongly condemn this decision, which is a continuation of similar decisions to expand settlements that have never stopped," Palestinian senior negotiator Saeb Erakat told AFP. "This decision will affect all the efforts to continue the peace process. The situation is very difficult," he added. Har Homa, which lies on the outskirts of the occupied West Bank town of Bethlehem, has been a flashpoint in the dispute over the city since its construction in the late 1990s. The controversy over Har Homa was reignited when, less than a week after the two sides formally relaunched peace talks in the US city of Annapolis in November, Israel unveiled plans to build more than 300 new housing units there. The latest planned expansions come on the eve of the next scheduled meeting between Olmert and Palestinian President Mahmud Abbas, who have pledged to try to strike a full peace deal by January 2009. The two have held several meetings since the talks were relaunched at the international conference hosted by US President George W Bush but have made little apparent progress since then. The Palestinians have repeatedly called the expansion of Jewish settlements in the West Bank including east Jerusalem the biggest obstacle to a final peace deal. "For sure we will be raising this issue, and the settlements are always the main issue in our negotiations with the Israeli side," Erakat said. Israel considers the whole of Jerusalem its "eternal, undivided" capital and insists it will continue to build in both the city's eastern sector and in the larger settlement blocs elsewhere in the West Bank that it hopes to keep in any deal. On Monday, Olmert is to head to the United States for a three-day visit during which he is expected to discuss both the peace process with the Palestinians and recently renewed negotiations with Syria. But at home he has faced mounting calls from the opposition and his own coalition partners to step aside, casting doubt on whether he will be able to make progress on either front. Meanwhile, three Palestinians and an Israeli soldier were wounded during an Israeli army incursion into the south of the Gaza Strip on Sunday, Palestinian medics and the Army said. The three members of Hamas were wounded to the east of the city of Khan Yunis during an exchange of fire with an Israeli unit backed by aircraft. An Israeli army spokeswoman said a soldier was moderately wounded in the fighting and that the operation was still underway. Israeli aircraft had conducted two raids in the area before the incursion, witnesses said.