The EU said it was "deeply disappointed that the Israeli Land Administration has published new tenders for 1466 housing units in settlements in East Jerusalem and the West Bank," saying the move detrimental to peace efforts.
Israel's housing ministry says it is advancing plans for 1,500 new settlement housing units in the West Bank and East Jerusalem in response to the new Palestinian unity government backed by Hamas.
In a statement, the EU said "What is needed right now is constructive engagement, in order to create a climate conducive to resumed negotiations.
"We call on the Israeli authorities to reverse this decision and to direct all their efforts towards an early resumption of the peace talks"
The PLO also slammed the move, saying it plans to appeal to the UN Security Council over the move.
"The executive committee of the PLO views this latest escalation with the utmost of seriousness," Hanan Ashrawi said in an English-language statement.
The PLO executive committee "will counter it by addressing both the United Nations Security Council and the General Assembly as the proper way of curbing this grave violation and ensuring accountability," she added.
Overnight, Israel's housing ministry unveiled plans for the new homes, 400 of them in annexed East Jerusalem, in what it said was a "fitting Zionist response" to the formation of a Palestinian unity government which includes Hamas.
The PLO threatened an "unprecedented" response to the move, with one senior official telling AFP the leadership was considering an appeal to the international justice system.
"The Palestinian leadership is looking seriously into going to international courts against settlement activity," the official said, speaking on condition of anonymity.
The option of legal action against Israeli settlement building at the International Criminal Court in The Hague opened up after the Palestinians won observer state status at the United Nations in 2012.
But they agreed to hold off on any such recourse for the duration of US-brokered peace negotiations with Israel, which collapsed earlier this year. More over, legal source described any such move as a double edged sword for the Palestinians, as it would also open them up to legal cases brought forth by Israel over terror activities and Hamas sanctioned rocket launches from the Gaza Strip.
"It is time to hold Israel accountable in front of international organizations in light of international law," chief negotiator Saeb Erekat told AFP.
"Those who fear the international courts should stop their war crimes against the Palestinian people, first and foremost of which is settlement activity."
AFP and the Associated Press contributed to this report