Thousands more homes
Biden's remarks come amid a report that tens of thousands of housing units in Jerusalem neighbourhoods are in various stages of planning and approval.
Sherine Tadros reports on continued settlement growth in occupied East Jerusalem
Israel's Haaretz newspaper, quoting "planning officials", said 50,000 units were awaiting approval and Jerusalem's construction plans for the next few years or even decades, would focus on the eastern part of the city.
Israel's interior ministry said the figure was inflated, adding that "a lot of times there're plans for more housing units that are never approved", Al Jazeera's Sherine Tadros reported from East Jerusalem.
The Haaretz report follows Israel's announcement this week that it will build 1,600 new housing units in Ramat Shlomo, a religious Jewish settlement in an area of the occupied West Bank annexed to Jerusalem by Israel.
The move sparked outrage from Palestinians and may have already derailed "proximity" talks between the two sides that were announced just this week.
Biden reiterated his condemnation of the timing of Israel's announcement on the project on Thursday, telling his audience at the university: "I, and at the request of President [Barack] Obama, condemned it immediately and unequivocally."
In his speech, he offered praise for Israel, saying the US has "no better friend", but added that "only a friend can deliver the hardest truth".
Apology but no reversal
Despite the strong words, however, he gave no sign on Thursday that Washington would press Israel to cancel the project, saying only that Binyamin Netanyahu, the Israeli prime minister, had assured him that construction at Ramat Shlomo would not start for years.
Netanyahu said he apologised to Biden for the poor timing of the announcement and reprimanded his interior minister, whose office announced the plan, but gave no sign he would cancel the construction.
Nabil Abu Rdainah, an aide to Mahmoud Abbas, the Palestinian president, told the Reuters news agency that Abbas had spoken to Biden by phone before his Tel Aviv address and "reiterated to him that Israel must annul the settlement project in Jerusalem so that indirect talks will not be obstructed".
But 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".
Late on Wednesday, Amr Moussa, the Arab League secretary-general, said Abbas had called off the planned indirect talks with Israel.
"The Palestinian president decided he will not enter into those negotiations now ... the Palestinian side is not ready to negotiate under the present circumstances," Moussa said, declaring 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."
US: Talks still on
But Abbas has not publicly declared that he will pull out of the talks and the US state department said on Thursday that it had received no information to indicate the Palestinian president would drop out.
"I don't think that that report that's been circulating for the last 24 hours is accurate. We've heard nothing to indicate that they've pulled out," PJ Crowley, a spokesman for the department, told reporters.
US officials expressed confidence that despite the flare-up, the indirect negotiations could begin as early as next week, when George Mitchell, the US Middle East envoy who announced the talks at the start of the week, is scheduled to return to the region.
Earlier, speaking to Al Jazeera in the occupied West Bank, Biden said the talks would hopefully lead to "a final agreement".
"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 [the Palestinian prime minister] 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."