Israel has announced plans for nearly 700 homes in mainly Arab East Jerusalem - despite Palestinian and international demands that it freeze building there.
White House spokesman Robert Gibbs said in a statement: "The United States opposes new Israeli construction in East Jerusalem."
Washington reiterated its call for both sides to resume stalled peace talks as soon as possible.
The European Union said it was "dismayed" by the announcement.
"Settlements on occupied land are illegal under international law," it said.
The new plans "contravene repeated calls from the international community and prevent the creation of the an atmosphere conducive to resuming negotiations," a statement from the Swedish EU presidency said.