"This announcement, like every other settlement announcement Israel makes, planning step they approve, and construction tender they issue, is counterproductive to Israel's stated goal of a negotiated two-state solution with the Palestinians," a State Department official said on Monday.
"We urge the government of Israel to reverse this decision."
The plan, announced Sunday, foresees the expropriation of of 400 hectares of Palestinian land by the Israel government.
According to the Israeli military, the move was a political decision made after the June killing of three Israeli teenagers snatched in the same area, known to Israelis as the Gush Etzion settlement bloc.
Israel has named three Palestinians from the southern West Bank city of Hebron as being behind the murders.
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The plan has angered the Palestinians and alarmed Israeli peace campaigners.
The move has also been slammed by Egypt, which last week mediated a permanent truce between Israel and the Hamas rulers of the Gaza Strip to end a 50-day war - the deadliest in years.
Israeli Prime Minister Benjamin Netanyahu's policy of settlement expansion on land the Palestinians claim for a future state is deemed illegal by the European Union and an "obstacle to peace" by the United States.
UN Secretary General Ban Ki-moon is "alarmed" by the Israeli plans to expropriate Palestinian land in the occupied West Bank, his spokesman says.
"The Secretary-General is alarmed by yesterday's announcement by Israeli authorities to declare as so-called 'state land' nearly 1,000 acres of land in the Bethlehem area of the West Bank," the spokesman said.
"The seizure of such a large swathe of land risks paving the way for further settlement activity, which - as the United Nations has reiterated on many occasions - is illegal under international law and runs totally counter to the pursuit of a two-state solution.
"The secretary-general calls on Israel to heed the calls of the international community to refrain from settlement activity and abide by its commitments under international law and the Quartet Road Map."
