Tensions are high in East Jerusalem after the Israeli announcement
US Secretary of State Hillary Clinton has sharply rebuked Israel over its recent decision to build new settlements in East Jerusalem.
She told Israeli PM Benjamin Netanyahu by telephone that the move was "deeply negative" for US-Israeli relations.
The BBC's Washington correspondent, Kim Ghattas, says it was a rare and sharp rebuke from Washington.
Israel's announcement overshadowed a visit by US Vice-President Joe Biden aimed at restarting peace talks.
Since then the Palestinians have indicated they will not return to the negotiating table unless the Israeli decision is revoked.
America's top diplomat delivered her rebuke during a 43-minute telephone conversation with Mr Netanyahu, the US state department said.
US state department spokesman PJ Crowley said Mrs Clinton called "to make clear that the United States considered the announcement to be a deeply negative signal about Israel's approach to the bilateral relationship and contrary to the spirit of the vice-president's trip".
Hillary Clinton called on Israel to show commitment to the peace process
"The secretary said she could not understand how this happened, particularly in light of the United States's strong commitment to Israel's security," he added.
"She made clear that the Israeli government needed to demonstrate not just through words but through specific actions that they are committed to this relationship and to the peace process."
The Quartet of Middle East peace mediators - the US, Russia, the EU and the UN - also condemned the Israeli housing announcement and said it would review the situation at its ministerial meeting scheduled for 19 March in Moscow.
Mr Netanyahu earlier apologised for the timing of the settlement announcement, which was made as Mr Biden was holding a day of talks in Jerusalem.
He said he had summoned Interior Minister Eli Yishai to reprimand him.
Israeli and Palestinian leaders had agreed to hold indirect, "proximity talks" in a bid to restart the peace process, which has been stalled for more than a year.
But after the announcement, the Palestinian Authority said talks would be "very difficult" if the plans for the homes were not rescinded.
Close to 500,000 Jews live in more than 100 settlements built since Israel's 1967 occupation of the West Bank and East Jerusalem. They are illegal under international law, although Israel disputes this.
The latest announcement by the Jerusalem municipality approves 1,600 new housing units in the East Jerusalem settlement of Ramat Shlomo.
POINTS OF TENSION IN JERUSALEM
1 Gilo: 850 homes approved for publication and planning objections in Nov 2009
2 Pisgat Zeev: 600 homes approved for publication and planning objections in Jan 2010
3 Sheikh Jarrah: Several Palestinian families evicted in past 18 months to make way for Jewish settlers after court ruled in ownership dispute
4 Ramat Shlomo: 1,600 homes approved for publication and planning objections in Mar 2010
5 Silwan: Demolition orders on 88 Palestinian homes built without difficult-to-get permits - Israel planning controversial renewal project
6. West Bank barrier: Making Palestinian movement between West Bank and Jerusalem harder - Israel says it's for security