Mr Abbas has called for the new housing plan to be cancelled
The Palestinian Authority has said indirect talks with Israel will be "very difficult" if more homes are built on occupied land as planned.
Israel announced the plan for 1,600 more homes in occupied East Jerusalem shortly before a peace process visit by US Vice-President Joe Biden.
Palestinian chief negotiator Saeb Erakat said they had "demanded that the Americans help us revoke this order."
The indirect talks were to be the first steps in resuming stalled peace talks.
Mr Erakat, speaking to the BBC, emphasised that "it is very difficult for us to engage in any negotiations unless the order [to build the homes] is revoked".
President Mahmoud Abbas had notified the Arab League secretary-general Amr Moussa and Mr Biden of his difficulties with the talks and settlements, Mr Erakat said.
According to Mr Erakat: "He told Moussa, 'I am waiting for [US Middle East envoy George] Mitchell to come back next week to give us the answer that the [settlements] decision has been cancelled'."
Mr Biden has condemned the Israeli move as undermining trust.
However, on Thursday he sought to stress US support for the Israeli nation, saying the US had "deep friendship and kinship with this magnificent country".
He said the US had "no better friend than Israel".
Israel and the Palestinians had earlier agreed to hold indirect "proximity talks" in a bid to restart the peace process, which has been stalled for 17 months.
After a meeting of delegates at the Arab League headquarters in Cairo, Mr Moussa told a news conference that the Palestinian president was "not ready to negotiate under the present circumstances".
Israel announced the East Jerusalem homes during Mr Biden's visit
Arab ministers would meet in the next few days to discuss the talks, which Mr Moussa described as "irrelevant" if Israel went ahead with the settlements.
The housing row has overshadowed the visit by Mr Biden, which was meant to promote a new round of US-led negotiations.
Israeli Prime Minister Benjamin Netanyahu expressed his regret to Mr Biden on Wednesday about the "unfortunate timing" of the announcement, his office said.
He said the final approval process for the settlement will probably take more than a year, with construction starting several years from now.
Mr Netanyahu also summoned Israeli Interior Minister Eli Yishai to express his displeasure, and told him to make sure it did not happen again.
Mr Biden had condemned Israel over the controversial building project.
He said the US would still play an active and sustained role in the talks process but warned that it was "incumbent on both sides not to complicate the process".
US special envoy Mr Mitchell is scheduled to arrive in the region next week to conduct the second round of proximity talks.