Maale Adumim, the largest of the West Bank settlements situated close to Jerusalem, is home to 28,000 Jewish residents. The new units are expected to house a further 2000 colonists.
In a brief statement released on Tuesday, the Dutch EU presidency said such plans ran counter to both "the letter and the spirit of the road map for peace that Israel has accepted".
"The presidency urges both Israel and the Palestinians to abide by their obligations under the road map in close cooperation with the Quartet," it added, referring to mediators the EU, United States, United Nations and Russia.
Egypt also added its voice to international denunciation, with Foreign Minister Ahmad Abu al-Ghait describing the proposed expansion as part of an "Israeli policy of provocation".
The expansion is "a blatant violation of Israel's commitments under its agreements, UN Security Council resolutions and the roadmap, which clearly calls for an end to settlement activities".
Under the terms of the road map peace plan, Israel is obliged to freeze all settlement activity in the occupied Palestinian territories where about 245,000 Jewish settlers live.
"A blatant violation of Israel's commitments under its agreements, UN Security Council resolutions and the roadmap, which clearly calls for an end to settlement activities"
Ahmad Abu al-Ghait,
Egyptian foreign minister
The Egyptian minister welcomed Washington's comments criticising the Israeli decision.
The United States on Monday stressed the road map "calls for an end to all settlement activities, including natural growth".
Abu al-Ghait called on Washington "as sponsor of the peace process, to take concrete action, along with the quartet, to put a stop to this plan".
He also called on the other three members of the quartet to "take firm action against these deeds, which deepen the lack of trust and confirm [Israel's] intention to seize additional Palestinian territories".
The ailing road map's original aim was to bring about the conditions for the creation of a Palestinian state alongside a secure Israel by 2005.
Arab League secretary general Amr Musa joined in the condemnation by calling the additional housing construction project "another chapter in the long litany of serious Israeli violations", in a statement on Tuesday.
The head of the Cairo-based organisation said it was proof the Israeli government "persists with measures aimed at killing off the prospects of establishing a Palestinian state".