Israel says it will not give in to international pressure to halt plans for 3,000 new settler homes in East Jerusalem and the West Bank.
PM Benjamin Netanyahu’s office said Israel would continue to stand by its “vital interests” and would not change its decision.
The UK, France, Spain, Denmark and Sweden summoned Israeli ambassadors in protest at the plans.
The US also called on Israel to “reconsider” its decision.
“We urge Israeli leaders to reconsider these unilateral decisions and exercise restraint as these actions are counterproductive and make it harder to resume direct negotiations,” White House spokesman Jay Carney said.
Russia, Germany and the UN have also objected to the Israeli plans.
Israel authorised the 3,000 additional housing units a day after the UN voted to upgrade the Palestinians to a non-member observer state.
Israel angrily condemned the Palestinian move as a “gross violation” of previous agreements.
Palestinians say the proposed new settlements would cut any future Palestinian state in half.
‘Almost fatal blow’
But Mr Netanyahu remained defiant.
“Israel will continue to stand by its vital interests, even in the face of international pressure, and there will be no change in the decision that was made,” an official from his office said.
Plans for construction in the E1 area – between Jerusalem and the West Bank settlement of Maaleh Adumim – are strongly opposed by Palestinians.
They say it will bisect the West Bank, cut off Palestinians from Jerusalem and prevent the creation of a contiguous Palestinian state.
UN Secretary General Ban Ki-moon earlier warned that the E1 plans would have to be rescinded.
“It would represent an almost fatal blow to remaining chances of securing a two-state solution,” Mr Ban said.
An Israeli official has described the proposals in the E1 zone as “preliminary zoning and planning work”.
Senior Palestinian negotiator Saeb Erekat said he hoped international pressure would convince Israel to suspend its plans.
“We hope that France and Britain can begin to show Israel that it cannot continue business as usual. Israel settlement activities cannot continue being business as usual. Every possible effort must be exerted in order to preserve the two-state solution.”
However, Israel’s minister of Environmental Protection, Gilad Erdan, said that after the UN vote on Palestinian status, Israel had no choice but to “initiate what is legitimate and what strategically strengthens the state of Israel”.
“What strategically strengthens the state of Israel is not just utterances and journalistic briefings to this or that media outlet, what strengthens Israel is that it has a Jewish settlement in Judea and Samaria [West Bank] and a strong military that protects the area,” he said.
The US State Department also issued a statement on Monday criticising the Israeli move.
“The United States opposes all unilateral actions, including West Bank settlement activity and housing construction in East Jerusalem, as they complicate efforts to resume direct, bilateral negotiations, and risk prejudging the outcome of those negotiations,” deputy spokesman Mark Toner said.
“This includes building in the E-1 area as this area is particularly sensitive and construction there would be especially damaging to efforts to achieve a two-state solution. We have made clear to the Israeli government that such action is contrary to US policy.