The United States is expressing deep disappointment in Israel's plans to build 1,100 new housing units in occupied east Jerusalem.
Department spokesman Victoria Nuland also called the announcement counterproductive to efforts to restart direct negotiations between Israelis and Palestinians.
The criticism Tuesday was matched by the European Union's foreign policy chief Catherine Ashton who called on Israel to reverse the decision.
Israel granted the go-ahead on Tuesday for construction of 1,100 new Jewish housing units in occupied east Jerusalem, and Prime Minister Benjamin Netanyahu ruled out any freeze in settlement construction, raising already heightened tensions after last week's Palestinian move to seek U.N. membership.
Israel's Interior Ministry said the homes would be built in Gilo, a sprawling Jewish enclave in southeast Jerusalem. It said construction could begin after a mandatory 60-day period for public comment, a process that spokesman Roi Lachmanovich called a formality.
The announcement drew swift condemnation from the Palestinians, who claim east Jerusalem as their future capital. The European Union's foreign policy chief in Brussels, Catherine Ashton, also said that the decision "should be reversed."
The Palestinians have demanded that Israel halt all settlement construction in east Jerusalem and the adjacent West Bank -- territories captured by Israel in the 1967 Mideast war -- as a condition for resuming peace talks.
Since capturing east Jerusalem, Israel has annexed the area and ringed it with about 10 Jewish enclaves which are meant to solidify its control. Gilo, which is close to the Palestinian city of Bethlehem, is among the largest, with about 50,000 residents. Israel's annexation of east Jerusalem has not been internationally recognized.
Saeb Erekat, the chief Palestinian negotiator, said the Israeli decision amounted to "1,100 no's to the resumption of peace talks."
He urged the United States, Israel's closest and most important ally, to change its position and support the Palestinians in their quest for U.N. membership. The United States has repeatedly called on Israel to cease settlement construction on land that could constitute a Palestinian state, but says the U.N. is not the proper place to resolve the conflict.
With peace talks stalled for the past three years, the Palestinians last week asked the U.N. Security Council to recognize an independent Palestinian state in the West Bank, east Jerusalem and Gaza Strip. Although the move won't change the situation on the ground, the Palestinians believe international support will boost their position in future peace negotiations.
The U.S. opposes the U.N. strategy and has vowed to veto the Palestinian request in the Security Council. Both Israel and the U.S. say a Palestinian state can only be established through negotiations.
But in an interview published Tuesday, Netanyahu ruled out any settlement freeze, arguing that a 10-month moratorium on new housing construction last year had failed to yield results.
The Palestinians, saying his limited freeze was insufficient, agreed to resume negotiations just weeks before the moratorium ended. Netanyahu then refused a U.S.-backed Palestinian demand to extend it, and the talks quickly collapsed.
Netanyahu has called for the resumption of peace talks without preconditions. He rejects calls to halt settlement construction and has dismissed demands that a Palestinian state be based on Israel's 1967 prewar lines -- pitting him odds with the Obama administration.
"The Palestinians, by coming back to the issue of the settlement freeze, indicate that they don't really want to negotiate," Netanyahu told the Jerusalem Post. "They use it again and again, but I think a lot of people see it as a ruse to avoid direct negotiations."
Meir Margalit, a Jerusalem city council member who opposes east Jerusalem construction, said city officials had given initial approval to the Gilo project more than a year ago.
He said he didn't expect the project to be "an obstacle of peace" since it is in an existing Jewish area that is widely expected to remain part of Israel in any peace deal. But he said Interior Minister Eli Yishai, leader of the hawkish Shas Party, appeared to have timed the approval as a response to the Palestinian statehood gambit. Yishai declined an interview request.
Seeking to break the deadlock, the international Quartet of Mideast mediators -- the U.S., EU, U.N. and Russia -- last week called on Israelis and Palestinians to resume negotiations. It called for a peace agreement to end the over 60 year-old conflict by the end of next year and urged both sides "to refrain from provocative actions."
Richard Miron, spokesman for U.N. Mideast envoy Robert Serry, said the Israeli decision was "very concerning" and ignored the Quartet's appeal. "This sends the wrong signal at this sensitive time," he said.
The fate of east Jerusalem is the most explosive issue in the Israeli-Palestinian conflict. The sector is home to Jerusalem's Old City, which houses sensitive Jewish, Muslim and Christian holy sites.
Netanyahu says he will never relinquish east Jerusalem, which Israel considers an integral part of its capital. The Palestinian leadership has vowed it will not accept a state without key parts of east Jerusalem as its capital.
In all, about 200,000 Jews live in east Jerusalem, which Israel calls neighborhoods and the Palestinians call settlements. Squeezed between them are Arab neighborhoods that are home to some 250,000 Palestinians.
There was no immediate U.S. reaction to the Gilo project.