The US administration warned that "at a time when we are working to re-launch negotiations, these actions make it more difficult for our efforts to succeed. Neither party should engage in efforts or take actions that could unilaterally preempt, or appear to preempt, negotiations."
Gibbs clarified that "the US also objects to other Israeli practices in Jerusalem related to housing, including the continuing pattern of evictions and demolitions of Palestinian homes.
"Our position is clear: the status of Jerusalem is a permanent status issue that must be resolved through negotiations between the parties."
"We condemn this in the strongest possible terms," Erekat said Tuesday. "It shows that it is meaningless to resume negotiations when this goes on."
The British government also criticized the plan to expand the neighborhood of Gilo, where about 40,000 Israelis live.
"The foreign secretary has been very clear that a credible deal involves Jerusalem as a shared capital," a British statement said. "Expanding settlements on occupied land in east Jerusalem makes that deal much harder. So this decision on Gilo is wrong and we oppose it."
Earlier Tuesday, the regional committee for planning and construction approved a motion to expand Gilo and south Jerusalem and build 900 new housing units in the neighborhood.
"The fact that the United States is against this or not is not a factor," one of the committee members told Ynet. "According to what is accepted at the moment, this territory belongs to Jerusalem and to Israel, and thus the Israeli planning and construction law applies to it and the committee must discuss the plan."
The Yedioth Ahronoth daily reported about the new dispute on Tuesday morning, following a demand made Monday evening by US special envoy to the Middle East George Mitchell in a meeting with Prime Minister Benjamin Netanyahu's emissaries.
Mitchell demanded an immediate stop to the construction in the neighborhood, after receiving information about the expected approval.
The Associated Press contributed to this report