The groundbreaking came a day after Israel defied American, European and Palestinian demands to stop settlement activity by announcing it will press forward with construction of 900 apartments in another Jewish area in east Jerusalem.
Speaking to Fox News in Beijing on Wednesday, Obama criticized the plan to build hundreds of homes in Jerusalem's Gilo neighborhood, saying such moves make it harder to achieve peace in the region and embitter the Palestinians in a way he said could be dangerous.
The Palestinians claim the West Bank and east Jerusalem — areas captured by Israel in the 1967 Mideast war — for their hoped-for state and have refused negotiations until Israel stops settlement construction in these areas.
The Palestinians say the continued growth of settlements on land they claim will make it impossible for them to establish a viable country of their own.
The Israeli government declined to respond to Obama's comments. But earlier in the day, Foreign Minister Avigdor Lieberman said Israel had no intention of stopping the Gilo construction. He called the neighborhood "an integral part of Israel, an integral part of Jerusalem."
The future of east Jerusalem is the most intractable issue in the Israeli-Palestinian conflict.
The area includes Jerusalem's walled Old City — home to sensitive Jewish, Christian and Muslim holy sites. Israel annexed east Jerusalem immediately after the 1967 war and claims all of the city as its eternal capital. The annexation was never recognized by other countries.
Speaking in parliament Wednesday, Prime Minister Benjamin Netanyahu did not address the tensions with the U.S. and ignored an Arab lawmaker who asked why he was allowing the new construction in Gilo.
Instead, Netanyahu reiterated his call for an immediate resumption of peace talks and criticized the Palestinians for refusing to return to the table.
"I hope the Palestinians answer our calls for negotiations," he said. "The Palestinians have groomed themselves with unrealistic expectations."