"We can't delay because when progress is postponed, extremists exploit our differences," he said.
Biden's remarks came amid media reports that tens of thousands of housing units in Jerusalem neighbourhoods are in various stages of planning and approval.
The reports in Haaretz newspaper followed the announcement earlier in the week of construction of 1,600 units in the occupied territories, a development that has derailed Israeli-Palestinian "proximity" talks.
Haaretz, quoting "planning officials", said 50,000 units were awaiting approval and that Jerusalem's construction plans for the next years, even decades, would focus on the eastern part of the city.
But Sherine Tadros, Al Jazeera's correspondent in east Jerusalem, said Israel's interior ministry said the 50,000 figures were inflated, adding that "a lot of times there're plans for more housing units that are never approved".
In his speech, Biden gave no sign Washington would press Israel to cancel the 1,600-units project.
But he said Binyamin Netanyahu, the Israeli prime minister, had assured him that construction at the site, a religious Jewish settlement, would not start for years.
Biden said Palestinians had misunderstood Israel's announcement of the settlement plan, thinking that building would begin immediately.
He said that with no construction scheduled yet, negotiators would have time to "resolve this and other outstanding issues".
Israel's refusal to halt construction in the occupied territories is a major sticking point in Israeli-Palestinian negotiations and threatens Palestinian prospects of ever getting an independent state.
Biden, who has been visiting Israeli and Palestinian officials with a view to reopening talks, suffered a major setback on Wednesday after Mahmoud Abbas, the Palestinian president, called off the "proximity" talks.
Amr Moussa, the Arab League secretary-general, said following an urgent meeting of delegates at the Arab League headquarters in Cairo that the talks would not be possible with the approval of new housing units.
"The Palestinian president decided he will not enter into those negotiations now ... the Palestinian side is not ready to negotiate under the present circumstances," he said.
Moussa declared that "insults have reached a point that not a single Arab could accept".
"Our position now is we reject the Israeli message. Abu Mazen [Abbas] is not ready to enter talks; it's useless," he said.
"The talks have already stopped."
Biden condemned Israel's decision to build more units, saying Tel Aviv's move undermined the trust needed for negotiations.
Jordan's King Abdullah II echoed this sentiment warning Biden during a visit to Jordan on Thursday that Israel's new settlements plans could lead to more regional violence.
He said "such unilateral actions, which are internationally rejected, threaten the peace process and put the entire region at risk of getting into a new cycle of conflict."
Earlier, speaking to Al Jazeera in the occupied West Bank, Biden said: ""The Palestinians and the Israelis had just agreed to begin proximity talks, hopefully leading to an agreement, a final agreement.
|Moussa declared that 'insults have reached a point that not a single Arab could accept' [AFP]
"It is so easy to focus on everything that's wrong in a relationship but when I speak to all these folks and my old friends, Mr Abbas and Mr [Salam] Fayyad and Mr Netanyahu, all these folks and old friends ... when you speak to them individually, the truth is that they're not far apart.
"This is a time when we should be building trust because I am absolutely convinced there's a desire on the part of the parties to move forward. They know the status quo is helpful to neither of them.
"Everyone knows the Palestinians deserve an independent state, the Israelis deserve an independent and secure state and for those kinds of actions to occur when there's more agreement than disagreement is just destabilising."
Israeli officials have, meanwhile, moved to take damage control measures, expressing regret over the timing of the announcement for the construction of more housing units.
Netanyahu reprimanded a senior official over the announcement, but gave no indication that he will reverse the order.
"The (prime minister) spoke to Vice-President Biden and expressed his regret for the unfortunate timing," the AFP news agency reported.
Gil Hoffman, a political correspondent for the Jerusalem Post, told Al Jazeera that "[Netanyahu] has made it clear that from his stand point Israel can build in Jerusalem [and that] the 10-month settlement freeze he declared only applies to the West Bank and not to Jerusalem".
"He sees Jerusalem as Israel's undivided capital and just like he builds in Tel Aviv and Haifa for Jews and Arabs he's going to continue building in Jerusalem for Jews and Arabs," Hoffman said.
Aides to Netanyahu said he had been caught unawares by the project's announcement.
Eli Yishai, the Israeli interior minister from the Shas party, said there was "certainly no intention to provoke anyone, and certainly not to ... hurt the vice-president of the United States".
But he admitted that final approval for the project would take another few months and the timing of the announcement "should have been in another two or three weeks".