"The substance and timing of the announcement, particularly with the launching of proximity talks, is precisely the kind of step that undermines the trust we need right now and runs counter to the constructive discussions that I’ve had here in Israel."
The Israeli decision also infuriated the Palestinians, who consider settlements to be a major hurdle to reach peace and want occupied east Jerusalem as the capital of their promised state.
"This is a dangerous decision and will hinder the negotiations," Palestinian Authority spokesman Nabil Abu Rudeina told AFP.
"We consider the decision to build in east Jerusalem to be a judgment that the American efforts have failed before the indirect negotiations have even begun."
Palestinian president Mahmud Abbas later telephoned Arab League chief Amr Mussa to call for "urgent policy measures" in response to "the escalating Israeli provocations," his office said without elaborating.
The Israeli move came two days after the Palestinians grudgingly agreed to indirect talks after months of US shuttle diplomacy and coincided with the trip by Biden, the highest-level Obama administration official to visit Israel.
Israel on Monday had already given the go-ahead for 112 new homes in a West Bank settlement in an exception to a partial moratorium on settlement construction announced in November which does not include east Jerusalem.
Earlier, Biden had reassured Netanyahu of Washington's "absolute, total, unvarnished commitment to Israel's security" and of its determination to stop the Jewish state's arch-rival Iran getting atomic arms.
Speaking to reporters in Jerusalem after meeting with Netanyahu, he said he was "very pleased" with the decision to hold new Middle East talks, despite deep scepticism about their prospects.
"We hope that these talks will lead, and they must lead eventually, to negotiations and direct discussions between the parties," he told Netanyahu.
"President Obama and I strongly believe the best long-term guarantee for Israel's security is a comprehensive Middle East peace with the Palestinians, with the Syrians, with Lebanon and leading eventually to full and normalised relationships with the entire Arab world," Biden said.
Netanyahu underlined the need "to be persistent and purposeful in making sure we get to those direct negotiations that will enable us to resolve this conflict."
But Biden was later forced to call on Israel to "build an atmosphere to support negotiations, not complicate them," according to the statement.
"This announcement underscores the need to get negotiations under way that can resolve all the outstanding issues of the conflict.
"We believe that through good faith negotiations, the parties can mutually agree on an outcome that realises the aspirations of both parties for Jerusalem and safeguards its status for people around the world."
Biden also held talks with President Shimon Peres, who cautioned against premature expectations.
"Even in Hollywood the happy ending is at the end," Peres said at the start of their meeting.
Biden heads on Wednesday to the West Bank city of Ramallah for talks with Abbas and prime minister Salam Fayyad, and he also plans to meet Britain's former premier Tony Blair, the special envoy for the Quartet of key diplomatic players.
Washington has pushed for months to have both sides resume talks, but direct negotiations have been on hold since Israel launched a devastating 22-day offensive in the Hamas-ruled Gaza Strip in December 2008.
US envoy George Mitchell has also been in the Middle East to pave the way for the indirect talks, and plans to return next week, while UN Secretary General Ban Ki-moon is due in the region later this month.
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