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Prime Minister Benjamin Netanyahu urged calm on Sunday as an angry Washington said it was insulted by Israel's "destructive" announcement of plans to expand settlements in east Jerusalem.

The rift is seen by many in Israel as the greatest crisis to hit the two close allies in decades, and it appeared to be deepening as senior US officials continued to berate Netanyahu despite his public apology on Thursday.

"We opened the papers this morning and saw the analyses and reviews. I suggest we not get carried away, and calm down," Netanyahu said ahead of a weekly cabinet meeting.

"We know how to deal with situations like these, calmly, responsibly and seriously."

Israel had thought the crisis -- provoked by an announcement of plans for 1,600 new settler homes in mostly Arab east Jerusalem during a visit by US Vice President Joe Biden -- was over following the apology.

But the United States has signalled over the weekend that things were far from business as usual.

US Secretary of State Hillary Clinton berated Netanyahu in a 43-minute phone conversation before telling the press the move was "insulting," and sent a "deeply negative signal" about Israel's ties to its top ally. Related article: Palestinians hail rare US condemnations of Israel.

On Sunday David Axelrod, one of President Barack Obama's closest advisers, echoed Clinton's remarks, saying the announcement was an "insult" to the United States and "very destructive" to the peace process.

"The crisis is still in full force and has reached new heights. It appears to be far more severe than anything we've known in the past decade, and perhaps even longer," Israel's Maariv newspaper said in an editorial.

Its front page showed a cartoon of Obama boiling Netanyahu in a large pot, under a banner headline, "In flames."

Israel has long viewed the United States as its most important ally and a crucial partner in confronting Iran's nuclear drive, which the Jewish state sees as its greatest strategic threat.

"We are heading into crucial days. The Iranian nuclear threat requires a prime minister who is the US president's darling," the Maariv editorial said.

"Instead, we have gotten ourselves a prime minister who is very close to being persona non grata in Washington."

Analysts said the crisis was a result of Netanyahu trying to manoeuvre one too many times between his mostly rightwing governing coalition and the United States, which has been pushing him toward peace talks with the Palestinians.

"It is a very serious crisis. During his first year Netanyahu manoeuvred in a very sophisticated way, walking on a tightrope like acrobat, and I think this is the first time he fell from the rope," said Alon Liel, a former director of Israel's foreign ministry.

"It still remains to be seen how painful it will be," he told AFP. "We have come to a moment of truth and Netanyahu has to make up his mind if he is serious about honestly responding to US and international demands."

Last week's announcement over the settlements dealt a heavy blow to months of US-led efforts to relaunch peace talks between Israel and the Palestinians that were last suspended during the December 2008 to January 2009 Gaza war.

Media reports said the United States and Israel had reached a secret understanding that the latter would refrain from announcing new east Jerusalem building projects during the talks, in conjunction with an already agreed public commitment to freeze new building starts in the West Bank for 10 months.

The presence of nearly half a million Israelis in more than 120 settlements scattered across the occupied West Bank including east Jerusalem has long been a major obstacle to the peace process.

In an attempt at damage control, Netanyahu set up a committee to investigate the settlement announcement, allegedly made without his knowledge, and prevent its recurrence.

He also told his ministers to refrain from talking about the issue and further inflame tensions.

However, the orders apparently failed to trickle down to Danny Danon, a junior lawmaker in Netanyahu's Likud party, who called Clinton's comments "gratuitous and frankly annoying."

"This is yet another in the disturbing series of counter-productive declarations from the Obama administration," Danon said in a statement.

AFP