Israel's ambassador to Britain was summoned to the Foreign Office on Monday to discuss plans for new settlements, officials said, warning of "strong reaction" to the proposals.
Foreign Office minister Alistair Burt called in Daniel Taub to warn that settlement building threatens the two state-solution and makes progress on peace talks with the Palestinians harder to achieve, the Foreign Office said.
"We have told the Israeli government that if they go ahead with their decision, then there will be a strong reaction," it said in a statement.
Israel's announcement about the 3,000 Jewish settler homes, whose planned location was not revealed, came in the wake of a historic vote by the United Nations General Assembly to upgrade the Palestinians' diplomatic status.
France also summoned the Israeli ambassador on Monday, amid speculation that the two countries are considering recalling their own envoys to Israel.
A diplomatic source in London told AFP the recall of the British ambassador was an option but insisted that no decisions had yet been taken.
The Foreign Office said: "Any decision about any other measures the UK might take will depend on the outcome of our ongoing discussions with the Israeli government and with international partners including the US and European Union."
Foreign Secretary William Hague this weekend said he was "extremely concerned" by Israel's decision to expand its settlements in response to the UN vote and said Britain "strongly advises the Israeli government to reverse this decision".
In its statement on Monday, the Foreign Office said Burt had summoned the Israeli ambassador to the Foreign Office this morning.
"The minister will set out the depth of the UK's concern about decisions concerning all settlement building, in particular in East Jerusalem, given their potential to alter the situation on the ground on a scale that makes the two-state solution, with Jerusalem as a shared capital, increasingly difficult to achieve," the statement said.