UN leader Ban Ki-moon has warned that Israeli plans for new settlements in east Jerusalem and the West Bank would deal an "almost fatal blow" to any prospects for peace with the Palestinians.
Israel's announcement about the 3,000 settler homes, whose planned location was not revealed, came in the wake of a historic UN vote to upgrade Palestine's diplomatic status.
"Settlements are illegal under international law and, should the E-1 settlement be constructed, it would represent an almost fatal blow to remaining chances of securing a two-state solution," Ban's office said in a statement.
His spokesperson said Ban expressed "grave concern and disappointment" at the bid that risks completely cutting off East Jerusalem from the rest of the West Bank.
"The secretary-general repeats his call on all concerned to resume negotiations and intensify efforts towards a comprehensive, just and lasting peace and urges the parties to refrain from provocative actions," the statement added.
On Thursday (local time), the United Nations General Assembly overwhelmingly backed a resolution recognising Palestine within the 1967 borders as a non-member observer state.
Israeli Prime Minister Benjamin Netanyahu had warned that by going to the UN, the Palestinians had "violated" previous agreements with Israel, such as the 1993 Oslo Accords, and that his country would "act accordingly."
Peace talks have been on hold since September 2010, with the Palestinians insisting on a settlement freeze before returning to the negotiating table and the Israelis insisting on no preconditions.
Israel has long feared that if the Palestinians won the rank of a UN non-member state, they could pursue the Jewish state for war crimes at the International Criminal Court - particularly over settlements.
With their newly acquired status, the Palestinians now have access to a range of UN agencies, as well as to the ICC, though Palestinian leader Mahmud Abbas said he had no plans to immediately petition the tribunal.