State department spokesman John Kirby called the plans the "latest step... in a systematic process of land seizures".
UN Secretary General Ban Ki-moon said he was "deeply disappointed" by the Israeli government's decision.
The international Quartet of Middle East peace mediators also recently criticised settlement construction.
About 570,000 Israelis live in more than 100 settlements built since Israel's 1967 occupation of the West Bank and East Jerusalem. The settlements are considered illegal under international law, though Israel disputes this.
Citing an Israeli official, the Associated Press reported that the Israeli plans included 560 new homes in Maale Adumim, just outside Jerusalem, as well as almost 200 in the city itself. The plan also called for more than 600 new homes in an Arab neighbourhood of East Jerusalem, AP said.
Mr Kirby said: "If true, this report would be the latest step in what seems to be a systematic process of land seizures, settlement expansions and legalizations of outposts that is fundamentally undermining the prospects for a two-state solution."
The plans were also sharply criticised by Ban Ki-moon.
"This raises legitimate questions about Israel's long-term intentions, which are compounded by continuing statements of some Israeli ministers calling for the annexation of the West Bank," the UN chief's spokesman said in a statement.
On Friday, the Quartet released a report saying Israeli settlement-building - along with continuing violence, terrorism and incitement, and lack of control of the Gaza Strip by the West-Bank based Palestinian Authority - was undermining peace hopes.
Israel welcomed parts of the Quartet report, but said it "perpetuates the myth that Israeli construction in the West Bank is an obstacle to peace".
The last round of peace talks between Israel and the Palestinians came to an end amid acrimony in April 2014.
The Palestinians accused Israel of reneging on a deal to free prisoners, while Israel said it would not continue negotiations after the Palestinians decided to bring the militant Islamist Hamas movement into a unity government.

The move is in line with UN sanctions aimed at curbing Pyongyang's nuclear weapons capability.
German media say City Hostel Berlin is run by a Turkish hotelier who pays more than €38,000 (£32,000; $41,000) a month in rent to North Korea.
The embassy also derives income from a conference hall at the site.
North Korea has conducted several nuclear tests and launched missiles, provoking fears that it could one day hit Japan or the US with a long-range nuclear strike.
German Foreign Ministry spokesman Martin Schäfer said "any kind of commercial activity on the site of the embassy or in relation to the embassy is prohibited".
"City Hostel in Berlin constitutes neither a diplomatic nor consular activity of a North Korean foreign representation," he said, adding that the government will move to "shut down the financial source to the North Korean regime as quickly as possible".
Germany's Berliner Zeitung newspaper says (in German) the ministry has warned the leaseholders that they must end their contracts with North Korea - otherwise they face hefty fines.
City Hostel Berlin was built in former communist East Germany and at the time housed North Korean embassy staff.
It is a popular budget option for travellers to Berlin, who can stay in an eight-bed dormitory room for just €9.50 per night.
The business relationship with North Korea was not confirmed by hostel staff, German media said.
UN Resolution 2321, adopted unanimously in November, tightened sanctions on North Korea, in response to Pyongyang's 9 September nuclear test.
It includes a clause stating that "all Member States shall prohibit the DPRK [North Korea] from using real property that it owns or leases in their territory for any purpose other than diplomatic or consular activities".
Markus Ederer, state secretary at the German Foreign Ministry, said "we must step up the pressure in order to bring North Korea back to the negotiating table".
The UN sanctions must be implemented to the letter, he said, "so it is especially important that we act to cut off the activities funding the nuclear programme".
The US has criticised Israeli plans to build hundreds of new homes in existing Jewish settlements in the occupied West Bank and East Jerusalem.
[NEXT_CONCEPT]
German authorities plan to terminate a North Korean business in the heart of Berlin - a big hostel next to the communist state's embassy.