EUROPE, May 7 (Reuters) - France, Germany, Italy, Spain and Britain urged Israel on Thursday to halt settlement-building in the occupied West Bank.

The joint statement came as tensions mounted in East Jerusalem ahead of a hearing that could see Palestinian families evicted from Sheikh Jarrah, a neighbourhood where Jewish settlers backed by an Israeli court have taken over some homes.

"We urge the government of Israel to reverse its decision to advance the construction of 540 settlement units in the Har Homa E area of the occupied West Bank, and to cease its policy of settlement expansion across the Occupied Palestinian Territories," the European nations said.

"If implemented, the decision to advance settlements in Har Homa, between East Jerusalem and Bethlehem, will cause further damage to the prospects for a viable Palestinian State."

Jerusalem, which contains sites sacred to Judaism, Islam and Christianity, is at the heart of the Israeli-Palestinian conflict.

Israel captured East Jerusalem, the West Bank and the Gaza Strip in a 1967 war. Palestinians want East Jerusalem as the capital of a future state and most countries regard settlements that Israel has built there as illegal.

However Israel claims all of Jerusalem as its capital, citing biblical and historical links to the city.

In Sheikh Jarrah, settlers and Palestinians living on the street where the evictions might take place have faced off in nightly clashes during Ramadan.

On Thursday night, the area was sealed off as far-right Israeli lawmaker Itamar Ben-Gvir set up an office outside one of the settler homes.

"I came here because children and women are being attacked every evening," he said.

After he spoke there were scuffles between Palestinians and Israeli police, who made 15 arrests.

A Reuters reporter saw a car ablaze near a home taken over by settlers in a back street near the eviction site. Police confirmed it belonged to an Israeli.

Among the crowd of Palestinian youths who gathered nearby Mohammed Abu Sneineh, 17, said he did not know who set fire to the vehicle, but he wanted the settlers to leave.

"Why did they come, this land is ours. Why do they want to displace us from it?" he said.