Israel announced it will release 26 veteran Palestinian prisoners ahead of a resumption of peace talks on Wednesday, but at the same time angered Palestinians by approving new settlement construction.

As some Israeli ministers criticised the government's prisoner release, Palestinians slammed the settlement plan, which Washington and the EU said was illegal and detrimental to peace efforts.

A special ministerial committee announced late Sunday it had approved the 26 prisoners to be released ahead of talks, according to a statement from the office of Israeli Prime Minister Benjamin Netanyahu.

The names of the prisoners -- most of whom were arrested for killing Israelis and Palestinians suspected of collaboration with the Jewish state -- were published early Monday morning.

They are expected to be freed ahead of the start of talks Wednesday in Jerusalem between Israeli and Palestinian negotiators.

The 26 constitute the first batch of a total of 104 long-term Palestinian and Israeli Arab prisoners to be freed in four stages, depending on progress in the talks.

Palestinian chief negotiator Saeb Erakat underlined the importance of the prisoner release for peace talks to continue.

"We hope to put into effect what we've agreed on... we hope for the release of 104 prisoners. Each will return to his house. This is what we've agreed on," he told Israeli Arabic-language radio.

"There is a clear understanding between us and the Americans and Israelis. Any change (in that) will mean the agreement is off the table."

The decision to free prisoners, however, has angered the families of those killed in assaults.

"This is a day of celebration for terror organisations," Meir Indor, head of Almagor, a group representing Israeli victims of Palestinian attacks, told AFP.

Most prisoners being freed were arrested for "murder", with five being "accomplices to murder" and one being guilty of "abduction and killing", Israel says.

All prisoners had been arrested before 1994 except one who was arrested in 2001.

Housing Minister Uri Ariel of the far-right Jewish Home party also reacted angrily to the impending releases.

"Terrorists belong in prison," Ariel said. "The terrorists who are being released murdered women and children, and it's not clear to me how releasing murderers can help peace."

Ariel's ministry had on Sunday announced tenders for the construction of 793 settlement housing units in annexed east Jerusalem and 394 elsewhere in the West Bank in a move that infuriated Palestinians.

Media reports have implied that the construction announcement was meant to appease Netanyahu's far-right coalition partners, who oppose the release of prisoners but fervently promote settlement construction.

"I don't know of such a deal, but look -- both were announced on the same day," Indor said.

Palestinian officials slammed the settlement announcement as a move aimed at "preventing" peace talks.

"It is clear that the Israeli government is deliberately attempting to sabotage US and international efforts to resume negotiations by approving more settlement units three days before the ... Palestinian-Israeli meeting," Palestinian negotiator Mohammed Shtayeh said.

"Israel is attempting to prevent negotiations from taking place on Wednesday."

The United States and the European Union both expressed concern over the settlement plans.

"These announcements that you're referring to certainly come at a particularly sensitive time," State Department spokeswoman Jen Psaki told reporters in Washington.

"We continue to engage with the Israeli government to make our serious concerns known," she said.

"Our policy has not changed," she added. "We don't accept the legitimacy of continued settlement activity."

The European Union warned that approval for the West Bank settlements threatened to torpedo the peace talks.

"Israeli settlements in the West Bank are illegal under international law and threaten to make a two-state solution to the Israeli-Palestinian conflict impossible," EU foreign policy chief Catherine Ashton's spokesman Michael Mann said.

Russia described the Israeli move as "a counterproductive step that complicates the atmosphere of the talks".

But a spokesman for Israeli Prime Minister Benjamin Netanyahu insisted that the new settlement units were "in areas that will remain part of Israel in any possible future peace agreement."

"It changes nothing," Mark Regev added.

Direct talks between Israelis and Palestinians resumed in Washington last month after painstaking US mediation.

The last talks in 2010 broke down on the issue of settlement building.