US President George Bush said this week Israel could retain parts of the occupied West Bank and Palestinian refugees should give up hope of regaining their homes in Israel.
At the request of Palestine, a full league member, the Arab League held a special session in Cairo at permanent representative level on Saturday to respond to Bush.
"The council ... affirmed unanimously that it rejects the new American position, which is likely to wreck the peace process in the Middle East," an official statement said.
"This position encourages Israel to persist in its aggression against the Palestinian people and its threats to security and stability in the region," it added.
"The council calls on the United States to do what is necessary to prevent the collapse of the principles of the peace process," the statement said.
The Arab League repeated the Arab position that no one but the Palestinians could renounce their right of return, which is enshrined in UN resolutions, and that Israel should withdraw to its borders on the eve of the June 1967 war.
The league said Arabs remained committed to their peace initiative of 2002, which offered Israel peace and normal relations with all Arab countries in return for withdrawal.