JERUSALEM, March 24 (Reuters) - Undeterred by turbulence in its ties with the United States and Britain, Israel on Wednesday confirmed further plans to expand the Jewish presence in occupied East Jerusalem, with more building freshly approved.

In a move sure to anger Palestinians and frustrate Western proponents of a freeze on settlement construction, a city official said approval was given to develop a flash-point neighborhood from which Palestinians were evicted last year.

Word of the move came as Prime Minister Benjamin Netanyahu completed an unusually low-profile meeting in Washington with US President Barack Obama for fence-mending talks, after their open spat over East Jerusalem earlier this month.

Netanyahu says he regretted the bad timing of an announcement of East Jerusalem building plans during the visit of US Vice President Joe Biden two weeks ago, which Washington called insulting.

But on Monday he insisted before an audience of influential American Jews that Jerusalem is our capital and building will continue there as Israel sees fit.

His defiant assertion coincided with a public slap to Israel from Britain, which announced it was expelling an Israeli diplomat over the forgery of British passports used by the suspected killers of a Hamas commander in Dubai.

Israel said it regretted Britain's decision but commentators on Wednesday predicted no meaningful damage to bilateral ties.

Irish, French, German and Australian passports were also forged by the assassination squad, and their authorities were expected to examine Britain's evidence implicating Israel.

In a comparatively rare public complaint, Saudi Arabia on Wednesday asked major powers involved in Middle East peace-making for clarifications about Israel's arrogant policy and its insistence on defying international will.

ONGOING PROCESS

Israeli media said Netanyahu was surprised by news of the latest plans to build apartments in the Sheikh Jarrah district, which has become a focal point for anti-settler demonstrations since Palestinian residents were evicted.

Chief Palestinian negotiator Saeb Erekat said it was part of Israel's attempt to forcibly end any Palestinian presence in East Jerusalem, and to foreclose any hope of reaching agreement on the core issue of Jerusalem in line with international law.

There is growing international frustration with Israel over the actions and decisions it is taking, he said. Israel is digging itself into a hole that it will have to climb out of if it is serious about peace.

Speaking on Army Radio, Jerusalem councillor Elisha Peleg said the plan had been advancing for months. The latest move was just a technical step on the way to approving 100 homes.

We will continue to build all over Jerusalem, in Sheikh Jarrah and Ras al-Amud as well, he said, naming another Palestinian neighbourhood in the Jerusalem area.

Erekat said President Mahmoud Abbas would insist that Israel revoke the Sheikh Jarrah project, as well as plans published during the Biden visit to build 1,600 houses at another site.

Israel annexed East Jerusalem as part of its capital after capturing it in the 1967 war. Its claim is not recognised internationally. Palestinians want East Jerusalem as capital of a future state they are seeking in the occupied West Bank.

In Washington, the Obama-Netanyahu talks yielded no sign of a breakthrough in the stalled peace process, which has been suspended for 15 months since Israel launched its offensive on the Islamist Hamas militants in the Gaza Strip.

In a sign of lingering tensions, the Obama administration withheld from Netanyahu some of the usual trappings of a White House visit. Press coverage of the Oval Office talks was barred, and the leaders made no public statements afterward.

President Obama and the prime minister met privately for an hour and a half, the atmosphere was good, Netanyahu spokesman Nir Chefetz said in a statement several hours after.

He said advisers continued discussions on the ideas raised at the meeting and would hold further talks on Wednesday.