In last week's decision, the United Nations General Assembly overwhelmingly recognized a Palestinian state in the West Bank, east Jerusalem and Gaza Strip, territories captured by Israel in the 1967 Mideast war.
Netanyahu rejects a return to the 1967 lines. His government also fears the Palestinians will use their upgraded status to join the U.N.'s International Criminal Court and pursue war crimes charges against Israel.
But Israel was joined by only eight other countries in opposing the bid, which was seen as a resounding international rejection of Israeli settlements in occupied territories. In a slap to Israel, its closest European allies — Britain, Germany, Italy and France — all abstained or voted with the Palestinians.
Israel has angrily condemned the vote as an attempt by the Palestinians to bypass negotiations. In particular, Netanyahu's government says it undermines any chance of negotiations over future border arrangements by endorsing the Palestinians' territorial demands.
The Israeli response to the U.N. decision was swift and strong. Just hours after Thursday's vote, Israel announced plans to build 3,000 new homes in the West Bank and east Jerusalem. It also said it would begin plans to develop a sensitive part of the West Bank just outside of Jerusalem.
Although construction is likely years off at best, the mere intention to build in the area known as "E1" is potentially explosive because of its strategic location in the middle of the West Bank. Israel also said it was withholding a regularly scheduled tax transfer to the Palestinians and using the money to pay off Palestinian debts to Israeli utilities.
After a flurry of angry European protests over the weekend, the Israeli ambassadors to Britain, France, Spain, Sweden and Denmark were all summoned by their hosts on Monday.
"I set out the depth of the U.K.'s concern about these decisions and I called on the Israeli government to reverse them. The settlements plan in particular has the potential to alter the situation on the ground on a scale that threatens the viability of a two-state solution," said Alistair Burt, Britain's minister for Mideast affairs.