"The decision of the Israeli government appears to lay the groundwork for conflict and tension in future between the two religious communities, Christian and Muslim," said Vatican spokesman Joachim Navarro Valls.

On Tuesday, Muslims gathered in Nazareth to witness the laying of the foundation stone for the controversial mosque near a Christian shrine. But churches across the holy land remained closed in protest for the second day, with church leaders accusing Israel of neglecting their interests.

"Political authorities have a great responsibility in this instance. Instead of encouraging unity, it is creating the basis for fomenting division," said the Vatican spokesman. Israel, reacting angrily to the criticism, rejected the Vatican's comment.

In a statement, Israel's Foreign Affairs Ministry said: "It's their unfortunate but time-honoured habit of pointing the accusatory finger in the wrong direction."

"The Israeli government took into consideration the opinion of all its citizens before authorising the building of the mosque and attempted to safeguard everyone's freedom of religion," it further said.