The U.S., Britain, France and other European states all denounced the plan.
On Sunday, the European Union's foreign policy chief, Catherine Ashton, expressed concern that such settlement expansion "may represent a strategic step undermining the prospects of a contiguous and viable Palestine with Jerusalem as the share capital of both it and Israel. She urged Israel to show its commitment to the early renewal of peace talks but not going ahead with the settlement plan.
"The European Union has repeatedly stated that all settlement construction is illegal under international law and constitutes an obstacle to peace," Ashton said in a statement.
On Sunday, the Israeli government delivered another blow, saying it would withhold more than $100 million in funds it transfers to the Palestinians each month.
Instead, it said the money — taxes and customs duties that Israel collects on behalf of the Palestinians — would be used to pay off its debts to Israeli companies, including $200 million owed to the state-run Israel Electric Corp., government officials said.
The monthly transfers are crucial for the cash-strapped Palestinian Authority to pay salaries to its tens of thousands of civil servants and security forces. Israel has taken similar measures in the past before eventually releasing the money.
At the weekly meeting of his Cabinet, Netanyahu said the Palestinian statehood campaign was a "gross violation" of past agreements calling for disputes to be resolved through negotiations.
"Accordingly, the government of Israel rejects the U.N General Assembly decision," he told his Cabinet on Sunday. He also pledged to continue building settlements.
"Today we are building, and we will continue to build in Jerusalem and in all areas that appear on Israel's map of strategic interests."
Half a million settlers live in the West Bank and east Jerusalem. The ongoing growth of the settlements is at the heart of the current impasse in peace efforts.