The United Nations, several Arab countries and Russia have all condemned Washington's announcement that it no longer considers Israeli settlements in the West Bank in breach of international law.
US Secretary of State Mike Pompeo's announcement of the policy reversal on Monday is one of several pro-Israel moves by the Trump administration, including the move of the US embassy to Jerusalem and recognition of Israel's claim to sovereignty over the Golan Heights.
With the expansion of settlements, Palestinians see the chances of finding a two-state solution dimming, as they want these areas for a future state.
The UN Security Council in 2016 demanded a complete stop to the building of settlements and passed a resolution designating them a violation of international law and a major obstacle to peace in the Middle East.
The UN human rights office said on Tuesday that Israeli settlements in occupied Palestinian territory remain in breach of international law.
"We continue to follow the long-standing position of the U.N. that Israeli settlements are in breach of international law," UN human rights spokesman Rupert Colville told a news briefing.
"A change in the policy position of one state does not modify existing international law nor its interpretation by the International Court of Justice and the Security Council," he said.
The International Court of Justice, in an advisory opinion issued in 2004, said that Israeli settlements in the occupied Palestinian territories, including East Jerusalem, were established in breach of international law.
The Fourth Geneva Convention of 1949 - which both the United States and Israel have ratified - lays down that an occupying power shall not transfer parts of its own civilian population into the territory it occupies, he said
The Russian foreign ministry condemned the change in US policy, saying it undermined the international legal basis for a settlement of the Israeli-Palestinian conflict and could worsen tensions in the region.
"International law is made by the international community and not just one country, no matter how important it is," Arab League chief Ahmed Abul Gheit said on Tuesday, stressing that settlements are illegal and "a shame for those who practice or support it".
He described the US statement as "unfortunate change" that can lead Israeli settlers to "practice more violence and brutality against Palestinian population and undermines any tiny prospect to achieve comprehensive peace" through US efforts.
Pompeo said the pro-Israel move provides a chance for a negotiated peace as opposed to a continuation of a dispute over the settlements' legality.
The Israeli government welcomed the move, with Prime Minster Benjamin Netanyahu saying during a visit to a West Bank settlement on Tuesday that the Trump administration "has corrected a historic injustice".
Saeb Erekat, the Palestinian Liberation Organisation's secretary general, said: "Israeli settlements steal Palestinian land, seize and exploit Palestinian natural resources, and divide, displace and restrict the movement of the people of Palestine."
He called on the international community to respond to the US action and criticised the Trump administration's "unceasing attempts to replace international law with the 'law of the jungle'."
