Stockholm - The decision by Israel to expand a settlement in Gilo near Jerusalem on the West Bank will damage the peace process the Swedish presidency of the European Union said Wednesday.

The move was counter to "repeated calls by the international community," the presidency statement said.

"If there is to be genuine peace, a way must be found to resolve the status of Jerusalem as the future capital of two states," the statement added.

Israel considers Gilo as part of its "eternal capital," and has opposed international demands to stop construction in areas of the city which are built within the municipal boundaries it has set for itself, but on occupied West Bank land. (dpa)