Plans to extend settlement building in the occupied Palestinian territories would alter the situation on the ground on a scale that would make a two-state solution "almost inconceivable", the Foreign Secretary has said.
William Hague told MPs the proposals by the Israeli government would make a two-state solution "very, very difficult to implement in the future".
Israeli ambassador Daniel Taub was ordered to the Foreign Office by Middle East minister Alistair Burt on Monday to be told of "the depth of the UK's concerns" about the plan for 3,000 more homes for Jewish settlers.
The Foreign Office said "other measures" could follow depending upon the outcome of discussions with the Israelis and other international partners, including the US and the European Union.
Benjamin Netanyahu, the Israeli prime minister, announced the settlement plan after the United Nations General Assembly last week overwhelmingly backed a call for de facto recognition of a Palestinian state.
Mr Hague said: "We think that is the wrong way to react to what happened much as we had misgivings for some of these reasons about pressing a resolution at the United Nations, now that is the wrong way to react to that and that message is coming loud and clear from all around Europe and the United States as well."
Lib Dem deputy leader Simon Hughes said the settlement move was "neither the way to win friends nor to win peace".
Mr Hague replied: "He is absolutely right in everything that he has just said. If implemented, these plans that were announced on Friday would alter the situation on the ground on a scale that makes the two-state solution, with Jerusalem as a shared capital, almost inconceivable, very, very difficult to implement in the future."
Shadow foreign secretary Douglas Alexander asked, that in light of the decision by the Israeli Government to withhold £75 million of Palestinian customs duties, what conversations ministers had had in recent days specifically with international partners "as to how to sustain a functioning Palestinian Authority".
Mr Hague replied: "Of course we are in discussions with other countries about this and we will have to assess exactly what the financial implications are." Britain, he added, was already a major donor to the Palestinian Authority.