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Israeli security personnel stand guard in a Palestinian neighbourhood in Jerusalem on Monday.Ronen Zvulun / Reuters

Israel on Tuesday outlawed an Islamist group accused of inciting violence among Arab citizens amid a two-month wave of unrest, and in a separate development approved the construction of hundreds of homes in a Jewish settlement in east Jerusalem.

The decision to ban the group threatened to worsen already strained relations with the country's Arab minority and was condemned by Arab leaders. The granting of final approval for the construction of more than 400 homes in east Jerusalem was likely to anger the Palestinians.

The international community opposes Israeli construction in east Jerusalem, which Israel captured in 1967 and the Palestinians claim as their capital. This particular project, in the Ramat Shlomo area, has drawn American ire because it was first announced during a visit to Israel by Vice-President Joe Biden in 2010.

The Northern Branch of the Islamic Movement of Israel, which provides religious and educational services for Israeli Arabs, routinely accuses Israel of trying to take over a sensitive holy site in Jerusalem, a charge Israel denies. Tensions over the site, which is revered by Jews and Muslims, are at the heart of the latest surge in Israeli-Palestinian violence.

The government announced early Tuesday that Prime Minister Benjamin Netanyahu's Security Cabinet had approved the widely expected measure. Israeli politicians have repeatedly called for the ban since the violence erupted in mid-September.

"We will continue to act against those who incite and who encourage terrorism, wherever they are," Netanyahu said.

After the decision, police closed 17 organizations affiliated with the party and searched more than a dozen of their offices, seizing computers, files and funds. Authorities also froze the group's bank accounts and the government said activists could be subject to arrest if they violate the ban.

The group's leader, radical cleric Raed Salah, said his party would fight the measure and continue its mission.

"All these measures done by the Israeli establishment are oppressive and condemned," Salah said, adding that he and two other party leaders were summoned for police questioning.

Salah is set to start an 11-month jail term later this month in connection with incitement charges from a 2007 sermon in which he allegedly called for a new uprising against Israel.

In a statement, the government claimed the movement is affiliated with the region-wide Muslim Brotherhood organization, has ties to the Palestinian militant Hamas group and is committed to Israel's destruction.

It accused the movement of "continuous incitement to violence and racism" and said the party has led "a campaign of lies and incitement" by accusing Israel of plotting to take over the Jerusalem holy site.

Israeli Public Security Minister Gilad Erdan sought to link the decision to the attacks in Paris, saying Israel should lead the "struggle against radical Islam, whose emissaries we saw massacring innocent people in Paris."

Salah's deputy, Kamal Khatib, said the party condemned the Paris attacks and charged Israel with exploiting the timing to "punish the Islamic Movement" over its position on Jerusalem.

The Islamic Movement in Israel also has a southern branch, which is considered more moderate and which was not affected by the ban.

Arab leaders and lawmakers condemned the move, saying it was aimed at "incriminating" all Arabs in Israel.

Arabs make up roughly 20 per cent of Israel's population, holding citizenship rights but frequently suffering discrimination in jobs, housing and public services.

Mohammed Barakeh, the head of an umbrella group of Arab Israeli political parties and community leaders, told Israeli Army Radio the decision was "an unjustified draconian step." The organization held an emergency meeting about the ban and called for a general strike later this week.

This is not the first such ban by Israel. Two decades ago, Israel banned two extremist Jewish parties that voiced support for attacks against Palestinians, declaring them terrorist organizations.

The current round of violence erupted in mid-September over rumours that Israel was trying to expand the Jewish presence at Jerusalem's holiest site, known as the Temple Mount to Jews and the Noble Sanctuary to Muslims.

The unrest then spread to the West Bank, Israeli cities and the Gaza border. Palestinian attacks, mainly stabbings, have killed 14 Israelis, and at least 83 Palestinians have been killed by Israeli fire, including 51 Israel says were involved in assaults. The rest were killed in clashes with security forces.

The Jerusalem hilltop compound houses the Al-Aqsa mosque and is the third holiest site in Islam. It is the holiest site in Judaism and was home to the biblical Jewish Temples.

Salah has alleged in speeches and annual rallies that Israel plans to expand its control there. Since 2001, the Islamic Movement has bused tens of thousands of supporters to the mosque compound every year to strengthen the Muslim presence.

The movement also helped form groups of male and female activists, known as "Morabitoun" — loosely translated as defenders of Islamic lands — who spend hours each weekday at the shrine trying to disrupt visits by Jews. Police at times have prevented busloads of Islamic Movement supporters from entering Jerusalem. Earlier this year, Israel outlawed three associations suspected of funding the Morabitoun and later declared the groups illegal.

Salah has had repeated run-ins with authorities and was previously imprisoned for funneling money to Hamas, which rules Gaza.

Hamas described Tuesday's ban as "racist," saying it targets Arabs in Israel and punishes the Islamic Movement for "protecting" sensitive holy sites like the Al-Aqsa mosque.

Israel says the wave of violence is the result of incitement from Palestinian leaders. The Palestinians say the violence stems from frustration over decades of Israeli occupation.

Israel has beefed up security across the country, sending soldiers to back up police and setting up checkpoints and concrete barriers in Arab neighbourhoods of east Jerusalem, where many of the attackers have come from.

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