US Vice-President Joe Biden has condemned Israel's approval of 1,600 new homes for ultra-Orthodox Jews in East Jerusalem.Mr Biden, in Israel as part of US attempts to kick-start the peace process, said it was "the kind of step that undermines the trust we need".
Israel insisted it was a procedural step not connected to the visit.
Mr Biden is now due to meet Palestinian President Mahmoud Abbas and Prime Minister Salam Fayyad in the West Bank.
On Thursday, he travels to Jordan for talks with King Abdullah.
'Dangerous decision'
Israel's approval of the new housing units has infuriated the Palestinians, who want East Jerusalem as the capital of their future state.
The international community considers East Jerusalem occupied territory. Building on occupied land is illegal under international law, but Israel regards East Jerusalem - which it annexed in 1967 - as its territory.
In a strongly worded statement, Mr Biden said: "I condemn the decision by the government of Israel to advance planning for new housing units in East Jerusalem.
"The substance and timing of the announcement, particularly with the launching of proximity talks, is precisely the kind of step that undermines the trust we need right now and runs counter to the constructive discussions that I've had here in Israel."
UN chief Ban Ki-moon also issued a statement condemning Israel's settlement plan.
"[Mr Ban] reiterates that settlements are illegal under international law," Reuters news agency quoted the statement as saying.
"Furthermore, he underscores that settlement activity is contrary to Israel's obligations under the roadmap, and undermines any movement towards a viable peace process."
Palestinian leaders have only recently agreed to resume indirect contacts with Israel, at Mr Biden's urging.
Palestinian Authority spokesman Nabil Abu Rudeina told AFP news agency: "This is a dangerous decision and will hinder the negotiations.
"We consider the decision to build in East Jerusalem to be a judgment that the American efforts have failed before the negotiations have even begun."
A spokesman for the Israeli interior ministry said: "The Jerusalem District Planning Committee today approved a plan which has been in the works for over three years.
"This is a procedural stage in the framework of a long process that will yet continue for some time. The committee meeting was determined in advance and there is no connection to US Vice-President Joe Biden's visit to Israel."
There are still various planning hurdles for the East Jerusalem project to clear, and work is not thought likely to start for at least two years.
Under US pressure, Israel has agreed a 10-month suspension of new building in the West Bank. But the moratorium excludes East Jerusalem, where the Palestinians want their capital.
'Moment of opportunity'
Mr Biden is the most senior member of President Barack Obama's administration to visit Jerusalem.
Earlier, at a joint news conference with Israeli Prime Minister Benjamin Netanyahu, he said there was a "moment of real opportunity" for peace between the Palestinians and Israel.
The Palestinians refuse to hold face-to-face negotiations with the Israelis unless they halt all settlement building in the occupied West Bank.
US Middle East envoy George Mitchell is expected to shuttle between the Palestinians in Ramallah and the Israelis in Jerusalem.
Mr Biden also said the US was committed to Israeli security and determined to prevent Iran from acquiring nuclear weapons.
He added that the best long-term guarantee for Israel's security was a comprehensive peace between Israel and its neighbours.
Mr Netanyahu said Israel would continue to support the US push for stronger sanctions against Iran, and that he was pleased its efforts to restart Israeli-Palestinian peace talks were "beginning to bear fruit".
He said the goal of negotiations was a peace deal that included Palestinian recognition of the "permanence and legitimacy of the Jewish state of Israel".
Correspondents say there is little optimism in the region about what the indirect Israeli-Palestinian talks might achieve.
Periods of direct negotiations over the last two decades have failed to reach agreement.
Mr Netanyahu's right-leaning government has taken a harder line stance on final status issues than that of the previous administration.
He has ruled out dividing Jerusalem, wants the Palestinians to recognise Israel as a Jewish state, and said he intends to maintain a presence along the eastern border of a future Palestinian state.
