The Ramat Shlomo area of Jerusalem is at the centre of the new homes row
US President Barack Obama has denied there is a crisis in Washington's ties with Israel over its settlement plans, as a war of words continues.
"Friends are going to disagree sometimes," he said, days after one of his top aides strongly attacked plans for 1,600 new homes in East Jerusalem.
Israeli PM Benjamin Netanyahu has distanced himself from an attack on Mr Obama by his brother-in-law.
Hagai Ben-Artzi had accused the US leader of being anti-Semitic.
Mr Netanyahu said he "strenuously" objected to his brother-in-law's comment and expressed his "deep appreciation" for Mr Obama's commitment to Israel's security.
Israel's approval of the new homes came after both sides agreed to hold indirect "proximity talks" to revive the peace process, stalled for more than a year.
Speaking on the Fox News Channel, Mr Obama said on Wednesday that the new settlement homes were "not helpful" for building a peace agreement between Israelis and Palestinians.
Mr Netanyahu said Mr Obama was commited to Israeli security
While he said the plan was a poor choice for Israel, he added: "Israel is one of our closest allies and we and the Israeli people have a special bond that's not going to go away."
Israel announced the Jewish settlement expansion as US Vice-President Joe Biden arrived for a visit last week.
The Palestinian Authority has refused to resume direct talks with Israel because of its refusal to put a stop to the expansion of settlements in the West Bank and East Jerusalem.
In November, Israel announced a 10-month suspension of new building in the West Bank, under heavy US pressure. But it considers areas within the Jerusalem municipality as its territory and thus not subject to the restrictions.
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.
In an interview with Israel Army Radio, Mr Ben-Artzi said Mr Netanyahu should learn from previous Israeli prime ministers.
"Once the Americans tried to intervene in anything related to Jerusalem we told them one simple word: 'No'," he said.
Mr Obama, he added, not only disliked Mr Netanyahu personally, but "dislikes the people of Israel".
"For 20 years, Obama sat with Reverend Jeremiah Wright, who is anti-Semitic, anti-Israeli, and anti-Jewish."
He said it was clear Mr Obama agreed with Rev Wright because he had remained a member of his congregation.
"Think about it. If you had heard of someone who for 20 years sat in church and heard anti-Semitic sermons and didn't get up to leave after two weeks, wouldn't you think he identifies with it?" he asked.
"As a politician running for presidency he had to hide it, but it comes out every time and I think we just have to say it plainly - there is an anti-Semitic president in America," he said.
"Unfortunately this creates a difficult situation for Israel, but we will never give up our deepest interests - Jerusalem and our ties with it."
Mr Obama broke with the Trinity United Church of Christ in 2008 after some of Rev Wright's controversial sermons emerged on the internet. In one, he said the 9/11 attacks were an example of "America's chickens coming home to roost".
"I have a deep appreciation for President Obama's commitment to Israel's security, which he has expressed many times," Mr Netanyahu said in a statement afterwards.
But despite the rebuke from his sister's husband, Mr Ben-Artzi repeated his criticism of Mr Obama in a later interview with Israel's Channel 2 television.
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