The US used its veto to halt the draft resolution, sponsored by the Gulf state of Qatar, that criticised the Israeli tank shelling of a home in Beit Hanoun on Wednesday in which seven children and four women were killed as they slept.
Amr Musa, the Arab League secretary general, said he was "surprised and disappointed" by the US move and said: "This veto will only increase anger.
"It is inexplicable that a veto can be used to protect Israeli actions against civilians."
He said the Arab world would not accept peace with Israel unless it was "just and balanced".
John Bolton, the US ambassador to the UN, earlier described the text of the resolution as "unbalanced" and "biased against Israel and politically motivated".
Ahmed Aboul Gheit, the Egyptian foreign minister, said America's action would "only lead to impose the situation that Israel wants, and increase the frustration of Palestinian people".
"It is inexplicable that a veto can be used to protect Israeli actions against civilians"
Arab League secretary general
A statement issued by Aboul Gheit's office said: "It is necessary for the Security Council to bear its responsibilities and stop turning a blind eye to Israeli acts in Gaza."
Egypt and other Arab powers fear that the latest bloodshed in Gaza could imperil an imminent deal for Hamas to reconcile with the more moderate Fatah movement and form a Palestinian unity government.
Ghazi Hamad, a spokesman for the Hamas-led Palestinian government, said the US veto showed America's foreign policy bias in the Middle East.
He told Al Jazeera: "Such a decision was expected, because the US have already given the green light for Israel to carry on these massacres."
Israel says the casualties were
caused by a 'technical error'
Arab foreign ministers are holding an emergency meeting on Sunday in Cairo, the Egyptian capital, to discuss plans to "confront on-going Israeli violence" against the Palestinian people", Arab League officials said.
The Arab League will also urge the UN Security Council to pass a resolution to form an international observation force to protect Palestinians, they said.
Israel has expressed regret for the loss of life in Beit Hanoun, but has said it will continue its military operations in Gaza.
It said an investigation indicated that the casualties in Beit Hanoun were caused by a "technical failure" in the fire control system of an artillery battery.