He said the timing of the announcement is "precisely the kind of step that undermines the trust we need right now".

And he added: "It runs counter to the constructive discussions that I've had here in Israel." Biden says Israelis and Palestinians must build an atmosphere to support negotiations, not complicate them.

Israel's interior ministry announced the construction plans just as Biden was wrapping up a series of warm meetings with Israeli leaders.

Israel claimed the timing of the announcement was coincidental.

At a dinner, prime minister Benjamin Netanyahu told Biden he was caught off guard by the announcement.

The premier acknowledged that the timing was poor and said he had no intention of sabotaging Biden's visit.

But Palestinian negotiator Saeb Erekat said: "The Israeli government is making it almost impossible for us, the Americans and the international community to take a one centimetre step in the direction of reviving the peace process."

Palestinian Authority prime minister Salam Fayyad said the building plan was "damaging" and posed a "great challenge" to restarting peace talks.

He added that the Palestinians appreciated "the strong statement of condemnation" by the US administration.

The construction plan also drew a sharp rebuke from Egypt - Israel's closest ally in the Arab world - and from UN Secretary-General Ban Ki-moon.

"This is absurd," said Hossam Zaki, an Egyptian foreign ministry spokesman.

"It is disdainful of the Arab and the Palestinian positions and the American mediation."

The Israeli media lambasted the building proposal, calling it an embarrassment.

"A slap heard round the world," read the headline of a front-page commentary in the daily Ha'aretz.