The two leaders met at the White House for 90 minutes to discuss Iran, peace with the Palestinians and the ongoing battle against the Islamic State militant group, Xinhua reported.
"The United States is deeply concerned by reports that Israeli government has moved forward with the planning process in the sensitive area, or in a sensitive area of East Jerusalem," White House spokesperson Josh Earnest told reporters at a press briefing.
The Palestinians seek to establish an independent state in the Gaza Strip and the occupied West Bank, with East Jerusalem as its capital. Israel's continued settlement building in the West Bank and East Jerusalem is a constant source of friction with Washington and was partly blamed for the collapse of US-brokered peace talks between the Israelis and the Palestinians in April.
The Israeli government approved the new construction plan last week, said Peace Now, an Israeli settlements watchdog.
"This step is contrary to Israel's stated goal of negotiating a permanent status agreement with the Palestinians, and it would send a very troubling message if they were to proceed with tenders or construction in that area," Earnest said.
"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," he added.
He stressed that the final status of Jerusalem "should not be prejudged and can only be legitimately determined through direct negotiations between the parties."