Britain and France have both summoned Israeli ambassadors in protest at Israel's decision to approve the construction of 3,000 new homes in the West Bank and East Jerusalem.
The UK said the move would cast doubt on Israel's "stated commitment to achieving peace with the Palestinians".
Israel authorised the 3,000 additional housing units a day after the UN voted to upgrade Palestinian status.
The UN warned the homes would be "an almost fatal blow" to peace hopes.
Russia and Germany on Monday also expressed opposition to Israel's settlement plans.
'Preliminary zoning'In a statement, the UK Foreign Office said it was urging Israel to reconsider, and threatened a "strong reaction" if the homes went ahead.
It said: "We deplore the recent Israeli government decision to build 3,000 new housing units and unfreeze development in the E1 block. This threatens the viability of the two state solution."
The British and French governments have made their displeasure at Israel's latest settlement announcement clear, and there are hints that further steps could be taken.
The threat to build in the area designated E1, east of Jerusalem, has especially annoyed Western governments - indeed, successive US administrations have been given assurances by Israel that it would not build there. Construction in E1 would effectively cut the West Bank into two and form a settlement barrier to the eastern approaches of Jerusalem.
Indications from Israel had suggested that its initial response to the UN General Assembly vote granting the Palestinians permanent observer status would be largely rhetorical. There's a sense in the air that the diplomatic climate is changing but no real evidence as yet that Washington - the critical player - is again ready to invest in the elusive quest for peace between Israel and the Palestinians.
Plans for construction in the E1 area - between Jerusalem and the West Bank settlement of Maaleh Adumim - are strongly opposed by Palestinians, who say such development will prevent the creation of a contiguous Palestinian state.
UN Secretary General Ban Ki-moon earlier warned that the E1 plans would have to be rescinded.
"It would represent an almost fatal blow to remaining chances of securing a two-state solution," Mr Ban said.
An Israeli official has described the proposals in the E1 zone as "preliminary zoning and planning work".
The Israeli envoy to Paris was summoned to a meeting on Monday morning, French foreign ministry spokesman, Philippe Lalliot, said in a statement.
The BBC's Peter Biles says the UK is coordinating closely with France in sending clear warning signals to Israel, but he says a suggestion in the Israeli press that Britain and France may recall their ambassadors in protest seems unlikely at this stage.
German government spokesman Steffen Seibert said Berlin expected Israel to "desist from this [settlements] procedure", while the Russian foreign ministry website said the move would have "a most adverse impact" on peace.
Israel has condemned the Palestinians' diplomatic move at the UN as a "gross violation" of previous agreements with Israel.
Prime Minister Benjamin Netanyahu also brushed off criticism of the settlement plans.
"We will carry on building in Jerusalem and in all the places that are on the map of Israel's strategic interests," he said.
About 500,000 Jews live in more than 100 settlements built since the occupation of the West Bank and East Jerusalem.
The settlements are considered illegal under international law, though Israel disputes this.
Two decades of on-off negotiations between Israel and the Palestinian Authority have failed to produce a permanent settlement, with the latest round of direct negotiations breaking down in 2010.
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