* Netanyahu had sought to delay East Jerusalem plan
* Palestinians condemn project, U.S. voices concern
* Debate follows world welcome for easing of Gaza blockade
(Adds State Department, Netanyahu comment, paragraphs 6-7)
By Allyn Fisher-Ilan
JERUSALEM, June 21 (Reuters) - Israeli municipal authorities moved ahead on Monday with a plan to raze some 20 Palestinian homes in East Jerusalem, risking more U.S.-Israeli friction over a building project seen by Palestinians as settlement expansion.
The Jerusalem city planning board ratified a proposal that could renew diplomatic pressure on Prime Minister Benjamin Netanyahu a day after he bowed to world calls to ease a Gaza blockade following Israel's deadly raid on an aid flotilla.
Citing concern over Israel's international image, Netanyahu had persuaded Jerusalem Mayor Nir Barkat to put the King's Garden project on hold in March, at a time when Washington was struggling to revive Israeli-Palestinian peace talks.
State Department spokesman P.J. Crowley said the United States was concerned about the project, though he said it was a preliminary step being taken by the Jerusalem municipality and not the Israeli government.
"We've had a number of conversations with the government of Israel about it," Crowley told reporters in Washington.
"This would appear to be the kind of action that undermines trust and ... adds to the risk of violence, he said, adding that housing and other projects in "the occupied areas of Jerusalem" should be decided in talks between the two sides.
Netanyahu's office said later in a statement the plan was "extremely preliminary" and still faced a long process and opposition before it could receive final approval.
City spokesman Stephan Miller said the board gave zoning approval for building 1,000 homes across 54 acres (22 hectares) in the East Jerusalem neighbourhood of Silwan.
The blueprint also calls for demolishing about 20 Palestinian homes built without permits, while licensing another 60 of the houses Israel says were built illegally.
Palestinians say building permits are impossible to obtain from Israel. The Obama administration has publicly appealed to Netanyahu not to demolish Palestinian homes.
Palestinian leaders have described the project as another attempt by Israel to cement its claim to all of Jerusalem, whose eastern sector it captured in a 1967 war and annexed in a move that is not recognised internationally.
"This is a municipality of colonisation," said Adnan al-Husseini, the Palestinian Authority-appointed governor of Jerusalem. "You cannot claim to be building 'gardens' while you are depriving people of a house to live in."
Israel drew U.S. anger in March, when it announced during a visit by Vice President Joe Biden a plan to build 1,600 homes for Jews in an area of the occupied West Bank it considers part of Jerusalem. Israel assured Washington building at the Ramat Shlomo settlement site would not begin for at least two years.
Under world pressure to rethink a Gaza embargo condemned by critics as collective punishment, Israel announced on Sunday that it would allow in all goods except for weapons and materials used to make them, while maintaining a sea blockade.
Netanyahu announced the new policy, which won U.S. and European praise, together with international Middle East envoy Tony Blair, who had been lobbying Israel to revise an embargo in force since Hamas Islamists rose to power in the coastal territory in 2006.
The White House said after the announcement that U.S. President Barak Obama would meet Netanyahu on July 6.
Miller said the King's Garden project was intended "to improve the quality of life" in Silwan and that a park and public complex slated to be built in the area would be used by Arabs and Jews alike.
Palestinians want East Jerusalem to be the capital of a state they hope to establish in the West Bank and Gaza Strip.
Miller said that even with the approval of the Jerusalem planning board, final ratification of the project, which also must go through a district commission, could take months.
Any move that could bring the home demolitions closer seems likely to direct more world anger at Israel, which was rocked by an international outcry over its killing of nine Turkish pro-Palestinian activists in the flotilla raid.
Israel said its naval commandos acted in self-defence after activists wielding metal rods and knives swarmed a boarding party in the May 31 interception. (Additional reporting by Mohammed Assadi in Ramallah; Editing by Mark Heinrich)