RELATIONS between Israel and Australia - already tense after Labor backed away from opposition to a Palestinian seat in the United Nations - have spiralled lower after Israel's ambassador was summoned for a dressing down.
Foreign Minister Bob Carr took the serious step of calling in Israel's ambassador Yuval Rotem on Tuesday afternoon to convey ''grave concern'' and extreme disappointment with plans to expand settler housing in East Jerusalem and on the West Bank.
Earlier, Prime Minister Julia Gillard had indicated the government was very concerned over the developments.
Senator Carr instructed new Foreign Affairs chief, Peter Varghese, to summon Mr Rotem over reports that Israel will build 3000 new housing units and unfreeze building in the highly sensitive area known as E1, a 12-square-kilometre patch of land east of Jerusalem.
Tax revenue will also be withheld from the Palestinian Authority in the occupied territories.
Despite widespread and growing condemnation of the announcement, the Israel government remained unrepentant.
Several European nations - including Britain, France and Spain - have all summoned Israeli ambassadors in protest at the expanded settlement plans, with the US also critical of the move.
A senior official in the office of Prime Minister Benjamin Netanyahu told Fairfax Media that Israel's ambassadors, when called in, linked the move to last week's vote in the UN to grant Palestinians a non-member observer seat.
''We have been warning for 1½ years that a Palestinian unilateral bid at the United Nations would be seen by us as a grave violation of the  Oslo Agreements. Israel has reserved the right to respond,'' the official said.
Asked if Israel was concerned about the international response, the official said: ''We are concerned that the Palestinians unfortunately had consistently not been acting like a partner in peace; their move at the UN was in stark violation of their own signed commitments.
''If one considers the gravity of the Palestinian provocation, Israel's response has been measured and proportionate in the extreme.''
Ms Gillard was forced to abandon personal opposition to the Palestinian plan, agreeing Australia would abstain in the vote after a fierce cabinet debate and threatened backbench revolt.
The decision to call in Mr Rotem - a diplomatic signal of deep displeasure - is the second time Australia has taken such a move with Israel in recent years. The last, in 2010, followed revelations that Israel's spy outfit Mossad used forged Australian passports during a hit on a Hamas leader in Dubai.
An official from the Israeli embassy in Canberra was also later expelled.
Senator Carr - who is visiting Papua New Guinea - said that Australia opposed all settlement activity and called on both sides to return urgently to the negotiation table.
Senator Carr told ABC radio the planned Israeli settlement in east Jerusalem would obstruct the borders of any eventual Palestinian state.
With JUDITH IRELAND