"The US is discouraging actions that it believes will unduly distract the principals from focusing on the advancement of peace negotiations. The Jerusalem expansion bill was considered by the administration to be one of those actions," the senior American official said.
The "Greater Jerusalem Bill" aims to solidify the city's Jewish majority, but stops short of formal annexation, making the practical implications unclear.
The bill says the communities would be considered "daughter municipalities" of Jerusalem, enabling some 150,000 Jewish residents of the West Bank to vote in Jerusalem city elections.
The settlements in question are Ma'ale Adumim, Efrat, Beitar Illit, and Givat Ze'ev.
Prime Minister Benjamin Netanyahu decided to postpone the legislation process for the bill, saying Jerusalem had to coordinate with Washington on the matter.
"We're in contact with the Americans," Netanyahu said ahead of the cabinet meeting on Sunday. "The Americans turned to us and inquired
"A few months ago, the President directed his advisors to continue discussions with regional partners about how best to support the peace effort. Those conversations are still ongoing," he said.
"On the margins of the UN General Assembly, US representatives met individually with representatives from Egypt, the United Arab Emirates, and other regional partners. More recently, the Special Representative for International Negotiations traveled to Cairo, Amman, Jerusalem, and Ramallah and met with officials, and he will have further meetings in the coming weeks," he continued.
"In addition, the Senior Advisor to the President, the Deputy National Security Advisor for Strategy, and the Special Representative for International Negotiations recently returned from Saudi Arabia. The Senior Advisor has also been in frequent contact with officials from Israel, the Palestinian Authority, Egypt, United Arab Emirates, Jordan and Saudi Arabia."
Reuters and the Associated Press contributed to this report.