Britain said on Wednesday it had summoned Israel's charge d'affaires and demanded a halt to a major West Bank settlement project after Israeli authorities opened bidding for more than 1,200 homes in the area.
The E1 plan, green-lit by Israel last year, has drawn international condemnation, with the UN secretary general saying at the time that it posed an "existential threat" to a contiguous Palestinian state.
The project would further separate east Jerusalem, occupied and annexed by Israel and predominantly inhabited by Palestinians, from the West Bank, said AFP.
British foreign minister Ed Miliband called the move "an unacceptable and destructive act" and said it would "endanger the viability of a two-state solution".
"The Israeli Government must halt E1 plans immediately, retract the tender and stop all settlement expansion," Miliband said in a statement.
Miliband said he delivered the message directly to his Israeli counterpart Gideon Saar and that Israel's charge d'affaires was summoned to the foreign ministry.
The British government also pledged to unveil "a comprehensive set of measures" in the coming weeks, including sanctions targeting people involved in the "illegal settlement expansion".
"Britain will not stand back and accept the destruction of the two state solution," Miliband said.
Israel approved the plans for the roughly 12-square-kilometer (five-square-mile) parcel of land known as E1 just east of Jerusalem, in August last year.
The plan seeks to build around 3,400 homes on the ultra-sensitive tract of land, which lies between Jerusalem and the Israeli settlement of Maale Adumim.
The latest tender covers more than 1,200 housing units, according to Israeli NGO Peace Now.
Peace Now said Israel's housing ministry published the tender on August 18 and immediately opened it for bids.
Submissions are due by October 19, one week before Israeli elections scheduled for October 27.
The group said the homes accounted for about one-third of the planned E1 development and accused the government of trying to advance construction commitments before the vote.
Israel heavily restricts the movement of West Bank Palestinians, who must obtain permits from authorities to travel through checkpoints to cross into east Jerusalem or Israel.
Last year, Britain and France were among 21 countries who condemned Israeli approval of the E1 project, calling it a violation of international law and urging Israel to reverse the decision.
Excluding east Jerusalem, the West Bank is home to around three million Palestinians, as well as about 500,000 Israeli settlers.
