Australia and the US have both criticised Israel's decision to build 3000 settler homes in east Jerusalem and the West Bank.
Australia's Foreign Minister Bob Carr says the move will seriously damage the prospect of peace in the region.
"Our embassy in Tel Aviv will be relaying Australia's deepest concerns to the government of Israel," he told ABC Radio.
US Secretary of State Hillary Clinton has also criticised Israel's decision, in a speech attended by top Israeli officials.
The White House earlier called the move - which came in response to a historic vote in the UN General Assembly on Thursday to recognize Palestine within the 1967 borders as a non-member observer state - "counterproductive".
"In light of today's announcement, let me reiterate that this administration - like previous administrations - has been very clear with Israel that these activities set back the cause of a negotiated peace," Clinton said.
Clinton was speaking at a forum in Washington hosted by the Saban Center for Middle East Policy.
Israeli Foreign Minister Avigdor Lieberman and Defence Minister Ehud Barak were in the audience when she made her remarks.
In a wide-ranging speech also tackling the conflict in Syria and Iran's suspect nuclear program, Clinton highlighted the troubled Middle East peace process, calling on Israelis and Palestinians to get back to negotiations.
"The most lasting solution to the stalemate in Gaza would be a comprehensive peace between Israel and all Palestinians, led by their legitimate representative, the Palestinian Authority," Clinton said.
Israel revealed the settlement plans in response to a historic vote in the UN General Assembly on Thursday to recognise Palestine within the 1967 borders as a non-member observer state - one which the United States opposed.
"This week's vote should give all of us pause. All sides need to consider carefully the path ahead," Clinton said.
"We all need to work together to find a path forward in negotiations that can deliver on the goal of a two-state solution. That remains our goal.
"If and when the parties are ready to enter into direct negotiations to solve the conflict, President (Barack) Obama will be a full partner to them."
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