Foreign Minister Bob Carr on Tuesday ordered his department to summon Ambassador Yuval Rotem to express disappointment over the plan.
Carr said in a statement: "These actions enormously complicate the prospects for resuming negotiations between the two sides."
There has been widespread international condemnation of the plan, which is likely to deepen a rift that has emerged between Israel and some of its closest allies following the U.N.'s recognition of a Palestinian state last week.
Israeli ambassadors were summoned for consultations in five European capitals.
Carr said Tuesday that Australia has long opposed all settlement activity and has conveyed its concerns to Israel.Suggest a correction