A spokesman for the secretary general said that Ban "believes that such actions undermine efforts for peace and cast doubt on the viability of the two-state solution".
The Secretary-General reiterated his position that settlements are illegal, and called on Israel to respect its commitments under the Road Map to cease all settlement activity, including natural growth.
Yedioth Ahronoth reported US President Barack Obama's envoy, George Mitchell, had asked an aide to Israel Prime Minister Benjamin Netanyahu, at a meeting in London on Monday, to block the proposed construction at the settlement of Gilo.
But a government planning commission approved the addition of 900 housing units at Gilo, where 40,000 Israelis already live.
Mark Regev, a spokesman for Netanyahu, had said in response to the newspaper report that "Prime Minister Netanyahu, in order to get the peace process back on track, is willing to adopt the policy of the greatest possible restraint concerning growth in the West Bank – but this applies to the West Bank."
"Jerusalem is Israel's capital and will remain as such," he said, stating an Israeli position not recognized by world powers.
"At a time when we are working to relaunch negotiations, these actions make it more difficult for our efforts to succeed," White House Press Secretary Robert Gibbs said.
In his statement, Gibbs also said the United States objected to continued evictions and demolitions of Palestinian homes in east Jerusalem.
US denouncement not enough
Nabil Abu Rdaineh, aide to Palestinian President Mahmoud Abbas, said Israel's move "destroys the last chances for the peace process."
Abbas has said peace talks stalled since December may resume only once Israel freezes settlement construction.
Britain's consulate-general in Jerusalem also condemned the Israeli move saying "this decision on Gilo is wrong and we oppose it."
Israeli high echelons in Jerusalem were taken a back by the strong international condemnation, saying that American were well aware that the Israeli agreement to freeze settlement construction does not include Jerusalem.