By Ori Lewis

JERUSALEM (Reuters) - Jerusalem's municipality has proposed building 500 more housing units in an area of the city annexed by Israel after the 1967 Middle East war, a settlement monitoring group said on Wednesday.

There was no immediate confirmation of the move by the Israeli government, but France condemned it.

The proposal is the first since the election of Donald Trump, whom Israeli right-wingers expect to be more supportive of settlement building than Barack Obama's administration.

Washington has been highly critical of Israeli settlement construction in the occupied West Bank and East Jerusalem. Most countries view all Israeli settlements on occupied land that the Palestinians seek for their own state as illegal.

The Palestinians, who want to establish a state in the West Bank and Gaza Strip, with East Jerusalem as its capital, say settlements are a fundamental obstacle to peace. The last U.S.-backed talks on statehood collapsed in 2014.

In Wednesday's announcement, Jerusalem's municipal planning committee recommended to the regional planning committee that it proceed with plans to build the 500 homes in Ramat Shlomo, an urban settlement to the north of Jerusalem.

The regional body initially proposed the plan in 2014 but never proceeded. The proposal came up again for discussion on Wednesday, said Betty Herschman, a spokeswoman for the Ir Amim advocacy group, which scrutinizes settlements.

After Trump's election, Israeli Education Minister Naftali Bennett, a right-wing party leader who backs Israeli settlement building and opposes a Palestinian state, was quick to state his view that "the era of a Palestinian state is over."

Jerusalem's mayor, Israeli businessman Nir Barkat, has also since reiterated his calls for expanded settlement building in Jerusalem, and Israel's parliament last week backed a bill to retroactively legalize settlement outposts built on privately owned Palestinian land in the West Bank.

Palestinian lawmaker Mustafa Barghouthi said Jerusalem's move was "only the beginning of a very dangerous step" and called on Trump "to immediately tell Israel that (he) will not support this horrible violation of international law."

Anticipating Wednesday's announcement, the French government issued a statement saying the move would isolate Palestinian areas "and prejudge the final status which can only come about through negotiations between Israelis and Palestinians."

France has proposed holding a peace conference between Israel and the Palestinians in Paris later this year, but Israel has rejected the idea and said it won't attend, saying only direct peace talks can bring about a peace deal.

(Additional reporting by John Irish in Paris, Writing by Ori Lewis; editing by Luke Baker and Raissa Kasolowsky)