Washington (CNN) -- Secretary of State Hillary Clinton said Wednesday the United States is "deeply disappointed" with Israel's decision to build new housing units in sensitive areas of East Jerusalem.
"This announcement was counterproductive to our efforts to resume negotiations between the parties," Clinton said, stressing that both parties should avoid actions that might undermine trust, including action in Jerusalem.
Clinton made the remarks at a joint press briefing with Palestinian Authority Prime Minister Salam Fayyad, where she announced an additional $150 million in aid to the Palestinian Authority. Fayyad appeared at the briefing via a remote video conference from Ramallah in the West Bank.
Clinton expressed hope that the peace talks will continue, and said the United States will keep working to resume negotiations to address the housing issue, among others.
"We still believe a positive outcome is both possible and necessary," she said.
Clinton is scheduled to meet with Israeli Prime Minister Benjamin Netanyahu on Thursday in New York.
President Barack Obama on Tuesday criticized Israel's plans to build new homes in the disputed area.
"This kind of activity is never helpful when it comes to peace negotiations," Obama told reporters while on a trip to Indonesia.
And Saeb Erakat, the chief Palestinian negotiator, told CNN that the announcement showed Israel is committed to the settlements at the cost of a possible peace agreement.
But Netanyahu's office issued a statement saying the construction has nothing to do with the settlement issue, since Jerusalem "is the capital of the state of Israel."
"Israel sees no link between the peace process and its development plans in Jerusalem," the statement read.
State Department spokesman P.J. Crowley said Wednesday that there is such a link, in that both parties are responsible for creating conditions for successful negotiations.
"So to suggest that this kind of announcement would not have an impact on the Palestinian side, I think, is incorrect," Crowley said.
Palestinians hope to make East Jerusalem the capital of a Palestinian state.