Israeli Prime Minister Benjamin Netanyahu listens as President Barack Obama speaks during their meeting in the Oval Office of the White House in Washington, Wednesday. (Pablo Martinez Monsivais/AP)

The Obama administration sharply criticized Israel on Wednesday, just hours after President Obama met with Israeli Prime Minister Benjamin Netanyahu, warning that it will face international condemnation “from even its closest allies” if it proceeds with a massive new housing project in East Jerusalem.

News of the construction effectively overshadowed the Oval Office meeting, the first between the two leaders since this summer’s Gaza war and the start of the multinational military offensive against the Islamic State.

State Department spokeswoman Jen Psaki said the United States is “deeply concerned” about the proposal to build more than 2,600 housing units in Givat Hamatos, or Airplane Hill, in East Jerusalem. The settlement would be built in an area the Palestinians envision as part of their future state, making it more difficult to realize Palestinian aspirations of East Jerusalem as their capital.

The housing development has been in planning for years but was on hold until last week, when the government ran a public notice that allows it to accept tenders and begin construction. The notice drew no attention, however, until the Israeli advocacy group Peace Now released a statement about it shortly before Obama and Netanyahu met.

“This development will only draw condemnation from the international community, distance Israel from even its closest allies, poison the atmosphere not only with the Palestinians, but also with the very Arab governments with which Prime Minister Netanyahu said he wanted to build relations,” Psaki said. She added that it also would “call into question Israel’s ultimate commitment to a peaceful, negotiated settlement with the Palestinians.”

White House press secretary Josh Earnest issued the same criticism and also condemned a Jewish group that legally but secretively purchased seven houses in the Arab neighborhood of Silwan outside the walls of the Old City. Jewish families have moved in, with police escorts, past Arab protesters.

“These provocative acts by this organization only serve to escalate tensions at a moment when those tensions have already been high,” Earnest said.

The diplomatic strain comes as Palestinians prepare to ask the U.N. Security Council to call for Israel to withdraw from the West Bank and East Jerusalem by December 2016. Palestinian President Mahmoud Abbas said a forthcoming resolution would ask the world body to demand a Palestinian state, based on 1967 borders, with East Jerusalem as its capital.

Abbas has threatened that if the resolution is vetoed, as it surely would be by the United States, Palestinians will try to take Israel to the International Criminal Court for alleged war crimes.

The housing construction and planned U.N. resolution have kept the Israeli-Palestinian conflict on the front burner even as Netanyahu and other Israeli officials have tried to turn public attention to threats posed by Iran and the spread of Islamic extremism.

In his address to the U.N. General Assembly last, week, Abbas accused Israelis of committing “genocide” during the 50-day Gaza war. Israeli officials then charged that Abbas was inciting hatred and was not a partner in possible peace negotiations.

Obama on Wednesday urged Netanyahu to seek a permanent peace with the Palestinians.

“I think we also recognize that we have to find a way to change the status quo so that both Israeli citizens are safe in their own homes, schoolchildren in their schools, from the possibility of rocket fire, but also that we don’t have the tragedy of Palestinian children being killed as well,” Obama said. “And so we’ll discuss extensively both the situation in rebuilding Gaza but also how can we find a more sustainable peace between Israelis and Palestinians.”

Netanyahu stressed a different priority — nipping in the bud what Israel perceives as a softening American attitude to Iran amid talks over that country’s nuclear program. Iran must not be left at the “threshold” of being able to develop nuclear weapons, he said.

“I firmly hope that under your leadership that will not happen,” Netanyahu told Obama.

Booth reported from Jerusalem. Katie Zezima in Washington contributed to this report.