"The government of Israel's continued construction in settlements in the occupied Palestinian territory is contrary to international law and to its commitments under the road map and the Annapolis process," he said in a statement on Monday.
Dana Perino, a White House spokeswoman, explained why the US does not believe that more settlements should be built. She said new construction creates tension in peace talks with Palestinians.
Perino said that the expansion of existing settlements in East Jerusalem is part of the problem as Palestinians feel that Israel is not serious about peace and that it "is not acting in good faith".
Meir Shitreet, the Israeli interior minister, defended the new settlement expansion by citing Biblical claims.
"Har Homa is part of Jerusalem. It's not a settlement. And sometimes people regularly forget Jerusalem is our capital, not since Camp David, but since King David, so that claims that they cannot build in Jerusalem is totally nonsense. No one in the government of Israel ever stop building in Jerusalem."
But Palestinians living in the occupied territories differ.
Mohamed Elian, a farmer living in the well preserved village of Wadi Fakun which has lost half of its land since Israeli occupation, believes that Israeli decision to build new colonies means working harder.
"Keeping the land planted would protect it from confiscation by the Israelis. That's why I have to stay here. Land titles mean nothing to them. You have to keep the land green to prove you're here."
Israel has expanded settlements around Jerusalem since occupying it in 1967.
This marks the fourth time Israel has announced a major construction project in occupied territory since the US-brokered Annapolis summit late last year.
Saeb Erekat, the Palestinian senior negotiator, said Israel should choose between settlement expansion and peace.
"We condemn the Israeli government decision to build new settlement housing units. This is a flagrant violation of the Annapolis process. This undermines our effort to continue with the peace process," he said.
Salam Fayyad, the Palestinian prime minister, sent two official letters to the EU and the Organization for Economic Cooperation and Development.
In the letters, Fayyad said that the on-going Israeli expansion "terminate any chances for peace".