Israel on Wednesday announced the new homes after upholding a High Court ruling to evacuate five families from the illegal Ulpana outpost.
"The decision to move settlers from an illegal outpost by creating housing units in settlements elsewhere across the Green Line sets a dangerous precedent," UK Foreign Secretary William Hague said in a statement.
"Such outposts are illegal under both Israeli and international law and should be removed entirely," he said.
Settlement activity is illegal, provocative and undermines the prospects of a peaceful two-state solution, Hague added.
"It makes it increasingly difficult for Israel’s international friends to defend the Israeli government's actions."
Germany also expressed concern over the settlement plans.
"The feasibility of a two-state solution must not be called into question by unilateral steps," German foreign ministry spokesman Andreas Peschke said in statement.
On Thursday, France urged Israeli Prime Minister Benjamin Netanyahu not to implement the construction plans and said it was essential to avoid provocations.
"We reaffirm that settlement activity is illegal under international law, undermines, on the ground, the foundations of the two-State solution and constitutes an obstacle to peace," French foreign ministry spokesman Bernard Valero said in a statement.
Israel on Thursday dismissed US criticism of its settlement plans.
"They need to condemn. We need to build," Construction and Housing Minister Ariel Attias told Army Radio.
A State Dept. spokesman told reporters Wednesday that "We do not accept the legitimacy of continued Israeli settlement activity," a standard US response.
The spokesman, Mark Toner, said the Americans "continuously raise" the issue of settlements with Israel.
Asked how effective that had been in the past few years, as Israel refused to implement a full settlement freeze, Toner responded that "I'm not able to give it a grade."
The PLO mission in Washington said Thursday that America's position had accomplished little, as the Israeli government "will not be deterred" by more statements decrying settlement construction as unhelpful to peace efforts.
"Furthermore, if the US continues to treat its support to Israel as unconditional, Israel will never have the incentive to halt its destructive and reckless settlement construction," the PLO office warned.
It condemned "in the strongest of terms" the latest decision by the Israeli government, and urged the Obama administration and international community to insist on a settlement freeze.
"It should have been clear by now that this stupefying inaction by the international community is precisely what emboldens Israel," the diplomatic mission said.
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