The US ambassador to Israel says that Washington expects Israel to retain control over large Jewish settlements in the West Bank.
Israel is planning to build 3,500 new homes at the Maale Adumin settlement
Dan Kurtzer told Israel Radio that it was unrealistic to expect a full Israeli withdrawal from the West Bank in any final status agreement.
He denied reports that he had said there was no such understanding between the US and the Israelis.
He said he was reiterating pledges by President Bush on the issue.
During a visit by Israeli Prime Minister Ariel Sharon to the White House last April, President George W Bush said a permanent peace deal would have to reflect "demographic realities" in the West Bank regarding Israel's settlements.
Palestinian officials criticised Mr Kurtzer's comments.
"The United States can't decide on behalf of the Palestinians and can't decide final status negotiation issues by itself.
"We urge the United States to have Israel stop settlement activity," senior Palestinian negotiator Saeb Erakat said.
Earlier this week, the Israeli government said it was planning to build 3,500 extra homes at the West Bank settlement of Maale Adumin, to the east of Jerusalem.
Palestinian officials called on the US to help block the expansion, saying if it went ahead it could prevent East Jerusalem becoming the capital of a future Palestinian state.
The international community considers all settlements in Gaza and the West Bank, including East Jerusalem, as illegal under international law, though Israel disputes this.
About 400,000 Jewish settlers live in Gaza and the West Bank, including East Jerusalem - alongside more than four million Palestinians.
Israel has occupied Gaza and the West Bank, including east Jerusalem, since 1967.