Israel has unveiled plans for 3200 settler homes in retaliation for the formation of a Palestinian unity government backed by Hamas and the international community.
Tenders for nearly 1500 new settlement houses and plans to advance about 1800 others were issued just 72 hours after the new Palestinian government was sworn in, ending seven years of rival administrations in the West Bank and Gaza.
Western states have shown support for the Palestinian line-up, but Israel says it will boycott what it denounces as a "government of terror".
The news drew a furious reaction from the Palestinians, who pledged to seek an anti-settlement resolution at the UN Security Council for the first time in more than three years.
UN chief Ban Ki-Moon was "deeply concerned" by the reports of the new tenders.
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"The secretary general calls on Israel to heed the calls of the international community to freeze settlement activity and abide by its commitments under international law and the road map," Ban's spokesman said.
The European Union said it was "deeply disappointed" by Israel's plans.
"We call on the Israeli authorities to reverse this decision and to direct all their efforts towards an early resumption of the peace talks," it said.
"This move is unhelpful to peace efforts."
Israel, however, rejected the criticism, with an unnamed official saying in a statement it was "strange" there were members of the international community who say a Palestinian unity government, backed by the militant Hamas movement, could promote peace.
"At the same time, there are those in the international community who say that construction in Jerusalem, Israel's capital, and other sites even the Palestinians know will stay under Israeli sovereignty in any future agreement, are moves that should be taken back," the statement said.
Of the 1454 tenders, 400 homes are to be built in Israeli-annexed east Jerusalem and the rest in the occupied West Bank in what Housing Minister Uri Ariel described as "a fitting Zionist response to the establishment of the Palestinian government of terror".
"I believe these tenders are just the beginning," he added, his remarks becoming reality hours later when an Israeli official confirmed the government had moved to unblock plans for another 1800 homes.
Hanan Ashrawi of the Palestine Liberation Organisation said the Palestinians would seek UN intervention to bring Israel to account for its settlement expansion drive.
The last time the PLO sought a Security Council resolution against the settlements was in February 2011, but the move - which was widely supported - was blocked by a US veto.
Another senior official told AFP the Palestinians were "looking seriously into going to international courts against settlement activity".
Nimr Hammad, political adviser to Palestinian president Mahmud Abbas, demanded the US take "serious steps" against Israel.
"Netanyahu is a liar and is not interested in the two-state solution," he told AFP, saying the Israeli leader wanted "to push the Palestinians into one of two options: either a confrontation, or ... to go to the United Nations".
