Vice-Foreign Minister Zhang Zhijun said the $5.85bn (Â£3.77bn) deal would "inevitably undermine bilateral relations", including military and security co-operation.
He also summoned US Ambassador Gary Locke to protest against the deal.
China traditionally reacts strongly to US military co-operation with Taiwan, which it considers its territory.
Last year, when the US sold missiles and other hardware to Taiwan, China suspended military exchanges with the US.
Correspondents say harsh words from China were expected, but it remains to be seen whether it takes any action to show its displeasure.
Zhu Feng, professor of international relations at Peking University, told the BBC he believed the Chinese reaction was aimed at a domestic audience.
"China's grandstanding gesture  - with very little action - is an attempt to avoid giving Chinese people the impression that despite the US's ongoing arm sales to Taiwan, the authorities are not responding in a robust manner," he said.
Some future bilateral military exchanges could be postponed as a result, but the US-China relationship would not suffer long-term damage, he said.
The US deal, revealed on Wednesday, falls short of what Taiwan had requested.
By Cindy SuiBBC News, Taipei
The US decision, though widely expected, still came as a disappointment for Taiwan.
Despite improved relations between Taiwan and China, Beijing continues to build up its military strength. And that build-up is widely seen as targeted at Taiwan, to warn the island it still claims as its province against becoming formally independent.
Analysts say Washington has become reluctant to sell Taiwan big-ticket items in recent years, for fear of angering Beijing. The US needs China's co-operation on many issues - from trade, to North Korea and buying US bonds to deal with its debt.
Washington faces a tough balancing act trying to juggle its relationship with China and its commitment to help its longtime ally Taiwan defend itself.
The announcement suggests the US will not now sell Taiwan a newer generation of F-16 fighters, as Taipei had hoped. It will instead upgrade its older-generation F-16 fleet.
US officials said the F-16 A/B fighters will undergo a retrofit which will bring them up to the same standards as the more advanced C/D models.
Mr Zhang called on Washington to "immediately cancel the wrong decision".
China's defence ministry, meanwhile, said that the US action had "caused serious damage to Sino-US military relations".
But Taiwanese officials appeared to welcome the news.
"After the upgrade, the air force's combat capability will be advanced hugely," Taiwanese Defence Minister Kao Hua-chu said at a press conference in Taipei.
The defence ministry said Taiwan remained under threat from China's military expansion.
"Improving our defence capability is a crucial... measure to sustain regional security and stable development across the strait," it said in a statement.
Taiwan also said it would continue its attempts to purchase more than 60 of the C/D planes, which are considered more of a match for China's latest war planes.
Taipei said that decision was still pending in the US and urged officials to agree to it.
Washington's decision will now pass to Congress for approval.
Some analysts say the decision to approve an upgrade - rather than provide more advanced fighters - is designed to appease Beijing, which had warned that relations would suffer if the sale went ahead.
In recent years China's military superiority over Taiwan has steadily increased, and the US is legally bound to help Taiwan defend itself under the Taiwan Relations Act passed in 1979.
China has reacted angrily to a US deal to upgrade Taiwan's ageing fleet of US-built F-16 fighter planes.