The US has "strongly condemned" Israel for approving plans for new West Bank settlement construction.
The White House and state department said plans for 300 new homes and an industrial zone were diminishing prospects for a two-state solution to the Israeli-Palestinian conflict.
Israel insisted fewer than 100 homes had been approved.
Its foreign ministry said the new homes would be built within the area of an existing settlement.
About 570,000 Israelis live in more than 100 settlements built since Israel's 1967 occupation of the West Bank and East Jerusalem. The settlements are considered illegal under international law, though Israel disputes this.
In July world powers warned of "perpetual occupation and conflict" between Israelis and Palestinians.
"The actions of the Israeli government in announcing this settlement undermine the pursuit of peace," said White House spokesman Josh Earnest.
State department spokesman Mark Toner said the new settlement would be "another step towards cementing a reality of perpetual occupation" that would "further call into question Israel's commitment to achieving a negotiated peace".
It was "deeply troubling", Mr Toner said, because Israel had announced it so soon after the US agreed last month to a 10-year $38bn (£30bn) military aid package for the country.
The announcement also followed a visit by President Barack Obama to Jerusalem last week for the funeral of former Israeli president Shimon Peres.
Palestinians want a state in the West Bank with east Jerusalem as its capital.