Amr Moussa, the Arab League Secretary-General, told reporters in Cairo.

The Palestinian move came only days after they succumbed to heavy American pressure to conduct indirect talks with Israel in an attempt to kick-start the logjammed Middle East peace process.

However, Israel today said the announcement of the settlement was a mistake and Mr Netanyahu has reprimanded Eli Yishai, the Interior Minister, over the timing.

The resumption of talks should have crowned the first visit to the region by Joe Biden, the US Vice President, this week, but the trip turned into a fiasco after the surprise Israeli announcement on Tuesday of building plans for Ramat Shlomo, an ultra-orthodox suburb of Jerusalem situated across the pre-1967 border in the West Bank.

Palestinians see East Jerusalem as capital of their future state, while Benjamin Netanyahu, the Israeli Prime Minister, considers it part of “the eternal, undivided capital of Israel and the Jewish people.”

Mr Biden and world leaders including David Miliband, the Foreign Secretary, and Baroness Ashton, the EU foreign policy chief, led wall-to-wall criticism of the Israeli move that Mr Abbas said was “the ruining of trust.”

The Arab League, which endorsed Palestinian participation in the US-brokered indirect talks last week, said on Wednesday that unless the Israeli building plans were cancelled, the talks would have “no meaning.”

Mr Biden, a long-time supporter of Israel in the US Senate, began the week praising the close ties and friendship between America and the Jewish state, but the Israeli move so wrong-footed his carefully choreographed trip that he issued one of the harshest condemnations of Israel ever uttered by the White House.

He was due to deliver a keynote address to the Israeli people at Tel Aviv University on Thursday morning that was being hastily rewritten in light of the week’s humiliating events.