Israel says it will appropriate 4 sq km (1.5 sq miles) of land in the occupied West Bank.
The decision regarding the land south of Bethlehem is believed to be the largest seizure by Israel in 30 years.
The military-run local administration said it was a response to the kidnapping and killing of three Jewish teenagers in the area in June.
Palestinians said diplomatic action should be taken against Israel. The US urged Israel to reverse the move.
A spokesman for UN Secretary General Ban Ki-moon said on Monday that he was "alarmed" by the decision.
"The seizure of such a large swathe of land risks paving the way for further settlement activity, which - as the United Nations has reiterated on many occasions - is illegal under international law and runs totally counter to the pursuit of a two-state solution," a statement said.
UK Foreign Secretary Philip Hammond also said he "deplores" the decision and called on Israel to reverse it.
The decision was announced on Sunday by the Israeli army department charged with administering civil affairs in the West Bank.
The takeover of the land in the area of Gush Etzion clears the way for expansion of a settlement named Gevaot.
Local Israeli settlements said they hoped to build on the land, which Palestinian officials said included many olive groves.
Chief Palestinian negotiator Saeb Erekat said the world community should hold Israel accountable for "the ongoing Israeli settlement activity in the West Bank and East Jerusalem", according to the AFP news agency.
Meanwhile, a US state department official was quoted by Reuters as describing the Israeli move as "counterproductive to Israel's stated goal of a negotiated two-state solution with the Palestinians".
The Palestinians want their state to include all land captured by Israel in 1967, but some 500,000 Jews now live in more than 200 settlements and outposts in the West Bank - including East Jerusalem.
The settlements are considered illegal under international law, though Israel disputes this.
Correction 18 September: A reference to the appropriation of land has been amended to more clearly reflect the contested status of the piece of land in question.