Israel's announcement of plans to build 1,600 homes for Jews in East Jerusalem was "destructive" to peace efforts, a top aide to Barack Obama says.
David Axelrod said the move, which overshadowed a visit to Israel by US Vice-President Joe Biden, was also an "insult" to the United States.
Israel's prime minister has tried to play down the unusually bitter diplomatic row between the two allies.
US Secretary of State Hillary Clinton last week issued her own stern rebuke.
Mrs Clinton told Israeli Prime Minister Benjamin Netanyahu by telephone on Friday that the Israeli move was "deeply negative" for US-Israeli relations.
'Affront'
Under the Israeli plans, the new homes will be built in Ramat Shlomo in East Jerusalem.
The international community considers East Jerusalem occupied territory and says Israel's building there is illegal under international law. But Israel regards East Jerusalem - which it annexed in 1967 - as its territory.
The Palestinians are threatening to boycott newly agreed, indirect talks unless the Ramat Shlomo project is cancelled.
"This was an affront, it was an insult but most importantly it undermined this very fragile effort to bring peace to that region," David Axelrod, one of President Obama's closest aides, told NBC television.
"We have just started proximity talks, that is shuttle diplomacy, between the Palestinians and the Israelis, and for this announcement to come at that time was very destructive," he said.
At a cabinet meeting on Sunday, Mr Netanyahu began by giving a survey of media coverage of the spat with the Americans.
"I propose not to be carried away and to calm down," he said. "We know how to handle these situations, calmly, responsibly and seriously."
He went on to admit that the announcement of project during the vice-president's visit had been offensive, but it had been an accident.
Mr Netanyahu has now set up a committee of senior officials to vet the timing of such announcements.
However, the BBC's Paul Wood, in Jerusalem, says it is clear the Americans are not persuaded that this was all just a bureaucratic mix up.
The ill-timed announcement on settlements has allowed Mr Netanyahu to shore up his right-wing coalition, our correspondent says.
But Israel needs the US to deal with Iran's nuclear programme - and that is an issue which Mr Netanyahu himself has said is more important than any other facing Israel.
Close to 500,000 Jews live in more than 100 settlements built since Israel's 1967 occupation of the West Bank and East Jerusalem. They are illegal under international law, although Israel disputes this.
The Quartet of Middle East peace mediators - the US, Russia, the EU and the UN - has also condemned the Israeli housing announcement and said it would review the situation at its ministerial meeting scheduled for 19 March in Moscow.
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