American Secretary of State Hillary Clinton has condemned Israel's decision to build 3000 settler homes in occupied East Jerusalem and the West Bank, callling it a setback to peace.
An official says Israel also plans to expedite planning for thousands more homes in a sensitive area close to Jerusalem, which critics say would kill off Palestinian hopes of a viable state, the ABC reports.
Israel's move came a day after the United Nations General Assembly voted overwhelmingly to upgrade the status of the Palestinians on Thursday.
Speaking at a forum in Washington attended by top Israeli officials, Mrs Clinton said Israel's latest expansion plans are counterproductive to peace.
Half a million Israelis already live on occupied Palestinian land.
Israel's planned construction would make it impossible to connect cities in the West Bank to East Jerusalem, which is seen by Palestinians as their capital in a future independent state.
The Palestinian Authority has said it will not return to peace talks without a freeze in settlement building.
The BBC reports the decision was announced on Friday, a day after a vote at the United Nations General Assembly upgraded the status of Palestinians at the UN to that of non-member observer state.
Earlier this month, a paper by Israel's foreign ministry said the UN move was "crossing a red line that will require the harshest Israeli response".
About 500,000 Jews live in more than 100 settlements built since the occupation of the West Bank and East Jerusalem. The settlements are considered illegal under international law, though Israel disputes this.