"For the secretary-general there is no plan B for the two states solution," UN chief Antonio Guterres's spokesman Stephane Dujarric said on Tuesday.
"In this respect any unilateral decision that can be an obstacle to the two state goal is of grave concern for the secretary general."
Israel approved a plan to build 2,500 new settlement homes in the occupied West Bank on Tuesday, two days after it accepted building permits for more than 500 settler homes in occupied East al-Quds (East Jerusalem).
The biggest settlement plan announced since 2013, it comes close after the election of US President Donald Trump, who has not been critical of settlement activity. Settlements are illegal under international law.
Last month, the UN Security Council passed a resolution demanding that Israel halt its settlement expansion in the occupied Palestinian territories.
Dujarric said the UN's position on settlement construction in the occupied West Bank and East al-Quds had not changed.
The European Union also warned that the move "further seriously undermine[s]" prospects for a two-state solution.
Israeli Defence Minister Avigdor Lieberman said in a statement that he and Prime Minister Benjamin Netanyahu agreed to the plan "in response to housing needs".
"It is regrettable that Israel is proceeding with this policy, despite the continuous serious international concern and objections, which have been constantly raised at all levels," the EU's external action service's spokesperson said.
Palestinian officials also condemned the latest announcement, Al Jazeera reported.
A spokesman for Palestinian President Mahmoud Abbas said it dealt a new blow to attempts to bring peace to the region and that it would promote "extremism".