"It seems to me the Israelis are determined to put a stick in the wheel of negotiations," he said.
"It will undermine the US effort to revive the negotiations."
Mr Olmert's spokesman, Mark Regev said it was not a new decision.
"This decision predates this government," he said.
"We have approved it. It is consistent with our policy of building within the large settlement blocs, which will remain in Israel in any final-status agreement," he added.
Israel Radio said the decision to restart the development was pushed by the ultra-Orthodox Shas party, which had threatened to quit the government coalition unless the construction was approved.
The decision comes three days after a Palestinian gunman opened fire in the library of a Jewish seminary in Jerusalem, killing eight young people.
The college was closely linked to the settler movement.