"Yesterday, the decision by the Israeli government to advance planning for new housing units in East Jerusalem undermines that very trust - the trust that we need right now in order to begin as well as produce profitable negotiations."US Vice-President Joe Biden has again condemned Israel over a controversial building project, saying its approval undermined trust in the peace process.
Mr Biden was speaking after meeting the Palestinian Authority President, Mahmoud Abbas, in the West Bank.
Mr Abbas also said the approval of another 1,600 homes in occupied East Jerusalem threatened the peace process and demanded the plans be scrapped.
Israel has insisted the move had nothing to do with Mr Biden's visit.
'Lasting peace'
Israel and the Palestinians had agreed to hold indirect "proximity talks" in a bid to restart the peace process, which has been stalled for 17 months.
However, the Israeli settlement announcement has cast a shadow on those talks, with the Palestinian Authority saying the approval showed Israel believed US negotiation efforts had failed before they had even begun.
Mr Biden told a joint press conference with Mr Abbas that he would condemn all statements that inflamed the situation or prejudiced the peace process.
He said the US would play an active and sustained role in the talks process and warned that it was "incumbent on both sides not to complicate the process".
"Yesterday, the decision by the Israeli government to advance planning for new housing units in East Jerusalem undermines that very trust - the trust that we need right now in order to begin as well as produce profitable negotiations."
Mr Biden said achieving peace would require both Israel and the Palestinians to take "historically bold" steps.
Mr Abbas said he was addressing the Israeli people in saying that the "time is right for peace based on two states - an Israeli state living in peace and security alongside a Palestinian state".
He said there should be a "permanent, lasting and just peace" that took in all areas, including Syria and Lebanon.
But he was also highly critical of the planning decision, saying it represented "the ruining of trust and a serious blow" to peace efforts.
Mr Abbas has refused to resume direct negotiations with the Israeli government because of its refusal to put a complete stop to the expansion of settlements in the West Bank and East Jerusalem.
Israeli denial
In November, Israel announced a 10-month suspension of new building in the West Bank, under heavy US pressure. But it considers areas within the Jerusalem municipality as its territory and the restrictions do not apply.
Close to 500,000 Jews live in more than 100 settlements built since Israel's 1967 occupation of the West Bank and East Jerusalem. They are considered illegal under international law, although Israel disputes this.
During their dinner on Tuesday evening, Israeli Prime Minister Benjamin Netanyahu told Mr Biden that he had no prior knowledge of the decision to authorise the new housing units in the ultra-Orthodox settlement of Ramat Shlomo, officials said.
He said the plans had been submitted three years ago and had only received initial approval that day.
"The district committees approve plans weekly without informing me," Interior Minister Eli Yishai, the chairman of the ultra-Orthodox Shas party, told Israel Radio on Wednesday morning.
"If I'd have known, I would have postponed the authorisation by a week or two since we had no intention of provoking anyone."
But the US government has not accepted Israel's explanation that the announcement was essentially part of a bureaucratic process that had no connection with Mr Biden's visit, says BBC Middle East editor Jeremy Bowen in Jerusalem.
Israel, deliberately or not, inflicted something close to a humiliation on the Obama administration and the words they chose in reaction reflected that, our correspondent says.
The UK Foreign Secretary David Miliband condemned the announcement by Israel.
"This is a bad decision at the wrong time. It will give strength to those who argue that Israel is not serious about peace," he said in a press statement.
"I condemn it as certain to undermine the mutual confidence we need."
EU foreign affairs chief Catherine Ashton also condemned the move, saying it risked peace talks before they had even begun and called on Israel to reverse the decision.
The Arab League was due to meet in Cairo to decide on a response.
Israeli government spokesman Mark Regev insisted Israel had "a very good working relationship and a very good personal relationship" with the US.
He dismissed speculation that the interior ministry's announcement was a deliberate move by some members of Mr Netanyahu's cabinet to scupper any chance of peace talks.
The US special envoy to the Middle East, George Mitchell, is scheduled to arrive in the region next week to conduct the second round of proximity talks.
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