Israel says it will not give in to international pressure to halt plans for 3,000 new settler homes in East Jerusalem and the West Bank.
PM Benjamin Netanyahu's office said Israel would continue to stand by its "vital interests" and would not change its decision.
The UK, France, Spain, Denmark and Sweden summoned Israeli ambassadors in protest at the plans.
The US also called on Israel to "reconsider" its decision.
"We urge Israeli leaders to reconsider these unilateral decisions and exercise restraint as these actions are counterproductive and make it harder to resume direct negotiations," White House spokesman Jay Carney said.
Russia, Germany and the UN have also objected to the Israeli plans.
Israel authorised the 3,000 additional housing units a day after the UN voted to upgrade the Palestinians to the status of a non-member observer state.
Israel angrily condemned the Palestinian move as a "gross violation" of previous agreements.
Palestinians say the proposed new settlements would cut any future Palestinian state in half.
'Almost fatal blow'
But Mr Netanyahu remained defiant.
"Israel will continue to stand by its vital interests, even in the face of international pressure, and there will be no change in the decision that was made," an official from his office said.
Plans for construction in the E1 area - between Jerusalem and the West Bank settlement of Maaleh Adumim - are strongly opposed by Palestinians.
They say it will bisect the West Bank, cut off Palestinians from Jerusalem and prevent the creation of a contiguous Palestinian state.
UN Secretary General Ban Ki-moon earlier warned that the E1 plans would have to be rescinded.
"It would represent an almost fatal blow to remaining chances of securing a two-state solution," Mr Ban said.
An Israeli official has described the proposals in the E1 zone as "preliminary zoning and planning work".
In a move that could raise tensions even higher, Israel on Monday said it would press ahead with plans to build another 1,600 settler homes in the East Jerusalem neighbourhood of Ramat Shlomo.
The controversial plan caused a diplomatic rift between Israel and Washington when it was first approved during a visit by US Vice President Joe Biden in March 2010.
Senior Palestinian negotiator Saeb Erekat said he hoped international pressure would convince Israel to suspend its plans.
"We hope that France and Britain can begin to show Israel that it cannot continue business as usual. Israel settlement activities cannot continue being business as usual. Every possible effort must be exerted in order to preserve the two-state solution."
However, Israel's minister of Environmental Protection, Gilad Erdan, said that after the UN vote on Palestinian status, Israel had no choice but to "initiate what is legitimate and what strategically strengthens the state of Israel".
"What strategically strengthens the state of Israel is not just utterances and journalistic briefings to this or that media outlet, what strengthens Israel is that it has a Jewish settlement in Judea and Samaria [West Bank] and a strong military that protects the area," he said.
The US State Department also issued a statement on Monday criticising the Israeli move.
"The United States opposes all unilateral actions, including West Bank settlement activity and housing construction in East Jerusalem, as they complicate efforts to resume direct, bilateral negotiations, and risk prejudging the outcome of those negotiations," deputy spokesman Mark Toner said.
"This includes building in the E-1 area as this area is particularly sensitive and construction there would be especially damaging to efforts to achieve a two-state solution. We have made clear to the Israeli government that such action is contrary to US policy.
Earlier, the UK said it "deplored" the plans and called on Israel to reverse the decision.
French President Francois Hollande, speaking at a news conference with Italian Prime Minister Mario Monti, said: "We don't want to shift into sanctions mode. We are more focused on persuading."
Germany, which is due to host a visit by Mr Netanyahu on Wednesday, said it took a "very negative view" of the settlement announcement.
About 500,000 Jews live in more than 100 settlements built since the 1967 occupation of the West Bank and East Jerusalem.
The settlements are considered illegal under international law, though Israel disputes this.
Two decades of on-off negotiations between Israel and the Palestinian Authority have failed to produce a permanent settlement, with the latest round of direct negotiations breaking down in 2010.