(FILES) This file photo taken on July 16, 2021, shows a view of the Israeli settlement of Efrat on the southern outskirts of Bethlehem in the occupied West Bank (Photo by / AFP)
The criticism by President Joe Biden's administration was some of the strongest in years on Israel after previous leader Donald Trump gave his blessing to settlements and annexations.
"We are deeply concerned about the Israeli government's plan to advance thousands of settlement units," State Department spokesman Ned Price told reporters.
"We strongly oppose the expansion of settlements, which is completely inconsistent with efforts to lower tensions and to ensure calm, and it damages the prospects for a two-state solution,," he said.
"We also view plans for the retroactive legalization of illegal outposts as unacceptable."
Price stopped short of saying the decision would jeopardize relations with Israel but said that the United States was raising the issue with its close ally.
The housing and construction ministry under Prime Minister Naftali Bennett, a right-winger close to the settlement movement who leads a coalition with centrists, on Sunday announced tenders for 1,355 homes in the West Bank, which has been occupied by Israel since the 1967 Six-Day War.
Palestinian prime minister Mohammed Shtayyeh had urged Washington to "confront" Israel on its "aggression" through the settlements.