Opponents of an Israeli government's decision to build a military college in East Jerusalem say the move will cause a diplomatic rift with the United States and Europe.

On Monday, Israel's Interior Ministry gave its initial consent to the construction of the compound, which will house the School for National Security and a military academy, as well as a command and staff school, currently located near Tel Aviv.

The quarter acre site on the Mount of Olives, is not far from Mount Scopus, where The Hebrew University of Jerusalem is located.

Israel came into control of the area after the 1967 war, which includes parts of the Arab village of Wadi Joz.

Israeli Interior Ministry spokesman Efrat Orbach told Xinhua that the location, chosen due to its proximity to the university, allows students to take advantage of university courses during their studies at the military facilities.

Despite Palestinian demands on some of the areas as part of their future capital, all Israeli governments including that of Prime Minister Benjamin Netanyahu consider all of Jerusalem, including areas beyond the 1948 armistice lines, as their " sovereign and eternal capital."

Meanwhile, left-wing groups fear the construction will spark criticism from the United States and Europe, who object to any Israeli building in disputed areas with the Palestinians that would be detrimental to the peace process.

Rights group Peace Now called the move a "crazy plan to build a military college in one of the most sensitive areas in dispute."

"This will inevitably harm the status of the state of Israel and the IDF in the world," Hagit Ofran of Peace Now's Settlement Watch Division told The Jerusalem Post.

"People in the world respect our army as part of our sovereignty, but the location - this is a very sensitive area - you're inviting them to boycott the Israeli army. This is going to be a problem even for those who support Israel," she said.

After the initial approval, the project will be open for public comment, before receiving final approval. The approval process could take several years.