(Adds Olmert comment, paragraphs 5-6)

JERUSALEM, June 1 (Reuters) - Israel announced plans on Sunday to build hundreds of new homes in an area of the occupied West Bank the Israeli government considers part of Jerusalem, despite U.S. and Palestinian calls to halt settlement expansion.

The announcement came two days before Prime Minister Ehud Olmert sets off for Washington for a three-day visit where he will meet U.S. President George W. Bush.

The 2003 peace "road map", reaffirmed by Israeli and Palestinian leaders at a conference hosted by Bush in November, requires a halt to all settlement activity on occupied land where Palestinians seek statehood.

Housing Minister Zeev Boim instructed his office to publish a tender to build an additional 763 housing units in Pisgat Zeev and 121 housing units at Har Homa, an area Palestinians refer to as Jabal Abu Ghneim.

Olmert later praised the housing plan at a meeting of his Kadima faction.

"We need to continue to strengthen Jerusalem as the capital of the state of Israel. This government is committed to it, it has been since its first day. It has lived up to its commitment and will continue to add and expand," Olmert said.

Both sites are located on lands captured by Israel during the 1967 Middle East war, and were incorporated into the municipal borders of Jerusalem in an act not recognised internationally.

Yasser Abed Rabbo, a senior aide to Palestinian President Mahmoud Abbas, said Olmert's government "talks about peace while at the same time works on undermining the basis of peace by increasing settlement activity in Jerusalem and around it".

Olmert, in keeping with the previous government's policy, has vowed to keep West Bank settlement blocs, including enclaves near Jerusalem, under any future peace accord.

Israel regards all of Jerusalem as its capital. Palestinians want East Jerusalem to be the capital of the state they hope to establish in the West Bank and Gaza Strip.

Last month Boim instructed his office to publish a tender to build 286 new homes in the Jewish settlement of Beitar Illit, near Jerusalem.

Palestinian leaders say settlement expansion around Jerusalem could cut off Palestinians' access to the holy city and carve up the West Bank in a way that would deny them a contiguous state. (Additional reporting by Wafa Amr in Ramallah) (Reporting by Avida Landau; editing by Elizabeth Piper)

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