* Press report says US asked Israel not to build in Gilo
* White House "dismayed" by Israeli move
* Abbas aide says Israeli decision destroys peace chances
(Adds condemnation by U.N. secretary-general, paragraph 7)
By Ori Lewis
JERUSALEM, Nov 17 (Reuters) - Israel triggered a fresh rift with Washington over settlement building on Tuesday by approving the building of 900 homes for Jews on West Bank land it occupied in a 1967 war and annexed to its Jerusalem municipality.
The Israeli daily Yedioth Ahronoth said U.S. President Barack Obama's envoy, George Mitchell, had asked an aide to Israeli Prime Minister Benjamin Netanyahu, at a meeting in London on Monday, to block the proposed construction at the settlement of Gilo.
But a government planning commission approved the addition of 900 housing units at Gilo, where 40,000 Israelis already live.
The Israeli decision drew an unusually sharply worded rebuke from the White House, which said it was "dismayed" and accused Israel of undermining Obama's efforts to resume peace talks with Palestinians stalled since December.
"At a time when we are working to relaunch negotiations, these actions make it more difficult for our efforts to succeed," White House Press Secretary Robert Gibbs said.
In his statement, Gibbs also said the United States objected to continued evictions and demolitions of Palestinian homes in East Jerusalem.
U.N. Secretary-General Ban Ki-moon also deplored the Israeli move, spokesman Farhan Haq said. Ban "believes that such actions undermine efforts for peace and cast doubt on the viability of the two-state solution" for Israelis and Palestinians, he said.
Nabil Abu Rdaineh, aide to Palestinian President Mahmoud Abbas, said Israel's move "destroys the last chances for the peace process." Abbas has said peace talks stalled since December may resume only once Israel freezes settlement construction.
A spokesman for Nir Barkat, the Israeli mayor of Jerusalem, seemed to confirm the newspaper report about Mitchell's request, saying Barkat "strongly objects to the American demand to halt construction in Jerusalem."
Israel rejects the international description of Gilo as a settlement and says it is a neighborhood of Jerusalem, the city it claims as its capital.
Some 500,000 Jews live in the West Bank and East Jerusalem, also captured in 1967, among 2.7 million Palestinians.
Israel annexed East Jerusalem after the 1967 war, a move that was not recognized internationally. Palestinians want East Jerusalem to be the capital of a state they hope to establish in the West Bank and Gaza Strip.
Mark Regev, a spokesman for Netanyahu, had said in response to the newspaper report that "Prime Minister Netanyahu, in order to get the peace process back on track, is willing to adopt the policy of the greatest possible restraint concerning growth in the West Bank -- but this applies to the West Bank."
"Jerusalem is Israel's capital and will remain as such," he said, stating an Israeli position not recognized by world powers.
Palestinian Foreign Minister Riyad al-Malki said Israel's decision was a further step "intended to prevent the Palestinian state from happening."
Britain's consulate-general in Jerusalem also condemned the Israeli move saying "this decision on Gilo is wrong and we oppose it."
Obama is pressing for a resumption of peace talks and has asked Israel to show restraint on settlements while seeking to persuade Abbas to resume negotiations without a total freeze on the construction.
Netanyahu has offered a temporary restriction on building projects, but Abbas has rejected this as insufficient, both in scale and because it does not include areas Israel annexed to Jerusalem.
Palestinian officials asked the United Nations and the European Union earlier this week to consider whether they might at some point endorse the framework of a Palestinian state without a negotiated solution to the conflict with Israel. (Writing by Allyn Fisher-Ilan; Editing by Eric Beech) (For blogs and links on Israeli politics and other Israeli and Palestinian news, go to http:/blogs.reuters.com/axismundi)