JERUSALEM (Reuters) - Israel issued on Thursday a tender for the construction of 447 housing units in settlements in the Jerusalem area, drawing fire from Palestinians who accused the Jewish state of sabotaging chances of peace.

Under the tender, Israel will build some 130 housing units in Har Homa, an area Palestinians refer to as Jabal Abu Ghneim. The tender also calls for construction of 317 housing units in Beitar Illit, a settlement near Jerusalem.

Palestinians see the building in Har Homa as the last rampart in a wall of settlements encircling Arab East Jerusalem, cutting it off from the rest of the occupied West Bank.

Palestinians want the land for a future state with Arab East Jerusalem as its capital.

A U.S.-sponsored "road map" for peace calls for Israel to freeze all settlement activity. The World Court has branded settlements as illegal.

Palestinian negotiator Saeb Erekat said the latest tender made clear Israel was "choosing settlements over peace".

"I don't know how many times the Israelis have to do this for the international community to open its eyes. Can't the world see this is destroying the peace process," he said.

Israel considers Har Homa and Beitar Illit part of the broader Jerusalem municipality and has vowed to continue construction there.

Several similar tenders have been issued since Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas launched U.S.-sponsored peace talks last November.

The talks, bogged down from the start by violence and disputes over settlements, have shown little sign of progress.

Olmert, dogged by a corruption investigation, announced last week that he would step down as prime minister once his centrist Kadima party chooses a new leader in September, a move some officials saw as a fatal blow to the negotiations.

(Reporting by Joseph Nasr and Ari Rabinovitch in Jerusalem and Haitham Tamimi in Hebron, Editing by Samia Nakhoul)