AL spokesman Hossam Zaki was quoted as saying that the implementation of the decision would undermine chances to achieve a real peace in the Middle East.
He regretted that the Israeli decision came on the first anniversary of an International Court of Justice (ICJ) ruling that the construction of the wall was illegal.
"East Jerusalem will become the eternal Palestinian capital whether Israel likes it or not," Zaki added.
The Israeli cabinet decided on Sunday to set Sept. 1 as the completion date for the building of a barrier around Jerusalem whose status remains disputed.
Around 55,000 Palestinian residents living in the holy city will be separated from work, schools and hospitals.
Israel insists that the barrier will help fend off Palestinian militant attacks on Israeli targets while the Palestinians see it as a land grab.