The US is said to be considering imposing economic sanctions on Israel over its construction plans in East Jerusalem and the West Bank.
Senior US officials are reportedly engaged in discussions over the possibility of punitive action against Israel over the matter.
According to the Israeli daily Haaretz, Obama administration officials are weighing the option of going beyond issuing mere condemnations so as to stop Israel from going ahead with its settlements plan.
A meeting is believed to have taken place among White House officials just after Israeli Prime Minister Benjamin Netanyahu met US President Barack Obama in Washington in October. The meeting was swiftly followed by a public spat.
US officials have ducked questions on the reported sanctions which, if implemented, could deal a severe blow to US-Israel relations.
"I'm obviously not going to comment one way or another on reported internal deliberation. We've made clear our position on settlement activity publicly and that hasn't changed," US state department spokesperson Marie Harf told reporters when asked about such proposal.
When pressed whether Washington would go a step further imposing sanctions on Israel, she insisted she would not "address hypotheticals".