The decision comes a day after a vote at the UN General Assembly upgraded the Palestinians' status at the UN to that of non-member observer state.
The US said the expansion plan was counterproductive and would make it harder to resume peace talks.
"We reiterate our longstanding opposition to settlements and East Jerusalem construction and announcements," White House spokesman Tommy Vietor said.
Earlier Palestinian President Mahmoud Abbas called for an end to settlement building and a return to peace talks.
According to the Israeli Haaretz newspaper, some of the new units will be between Jerusalem and the settlement of Maale Adumim.
Plans to build settlements in the area, known as E1, are strongly opposed by Palestinians, who say the development will cut the West Bank in two, preventing the creation of a contiguous Palestinian state.
"It is an act of Israeli aggression against a state, and the world needs to take up its responsibilities," senior Palestinian official Hanan Ashrawi told the AFP news agency.
Earlier this month, a paper by the Israeli foreign ministry described the Palestinians' pushing for the vote as "crossing a red line that will require the harshest Israeli response".
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.
'Political theatre' Earlier on Friday, Israeli government spokesman Mark Regev said the UN vote was "negative political theatre" that would "hurt peace".
The General Assembly voted by 138-9 to recognise the Palestinians as a non-member observer state, with 41 states abstaining.
The Palestinians can now take part in UN debates and potentially join bodies like the International Criminal Court (ICC).
Palestinian President Mahmoud Abbas said it was the "last chance to save the two-state solution" with Israel.
Two decades of on-off negotiations between Israel and the Palestinian Authority (PA) in the West Bank have failed to produce a permanent settlement, with the latest round of direct negotiations breaking down in 2010.
In January, several months of indirect "proximity talks" ended without any progress.
Palestinian negotiators insist that the building of Jewish settlements on occupied land must stop before they agree to resume direct talks.
Their Israeli counterparts say there can be no preconditions.
Mr Abbas was much criticised by many Palestinians for remaining on the sidelines of the conflict between the militant Hamas movement and Israel earlier this month in Gaza.
AnalysisThe decision of the UN in New York to upgrade the status of the Palestinians by an overwhelming majority could be seen as largely symbolic. But the point is that in the Middle East, symbolism matters.
Plenty of attention in the build-up to the vote was centred on a technical question about UN procedures which could have far-reaching political implications - would this upgraded status give the Palestinians access to UN agencies and the International Criminal Court?
If it did, then they would be able in theory to pursue Israel for its settlement policies on the West Bank - widely seen as a clear breach of international law.
Israel rejects that legal interpretation - but it may not be anxious to see the issue tested in court.