The Obama administration wielded its first veto at the UN security council last night in a move to swipe down a resolution condemning Israeli settlements in Palestinian territory.

The US stood alone among the 15 members of the security council in failing to condemn the resumption of settlement building that has caused a serious rift between the Israeli government and the Palestinian authority and derailed attempts to kick-start the peace process. The Palestinians have made clear that they will not return to the negotiating table until Israel suspends settlement building in East Jerusalem and the West Bank.

The decision placed the US in a controversial position at a time when it is already struggling to define its strategy in a tumultuous Middle East.

The 14 member countries backing the Arab-drafted resolution included Britain and France.

The US ambassador to the UN, Susan Rice, said the decision to use the veto power – open to the five permanent members of the UN, of which the US is one – "should not be misunderstood to mean we support settlement activity".

She said Washington's view was that the Israeli settlements lacked legitimacy, but added: "Unfortunately, this draft resolution risks hardening the positions of both sides and could encourage the parties to stay out of negotiations."

But the isolated stance of the Obama administration risked the appearance of weakness in its approach to the search for Middle East peace and set it on a contradictory course to its earlier tough language against the settlements.

The Palestinian observer at the UN, Riyad Mansour, said the veto was unfortunate. "We fear ... that the message sent today may be one that only encourages further Israeli intransigence and impunity," he said.

Washington's controversial move clearly riled other members of the security council. Britain, France and Germany put out a joint statement in which they explained they had voted for the resolution "because our views on settlements, including east Jerusalem, are clear: they are illegal under international law, an obstacle to peace, and constitute a threat to a two-state solution. All settlement activity, including in east Jerusalem, should cease immediately."

William Hague said he understood Israeli concern for security, but said that was precisely why Britain had backed the resolution. "We believe that Israel's security and the realisation of the Palestinians' right to statehood are not opposing goals. On the contrary, they are intimately intertwined objectives." The US has used its veto 10 times since 2000, nine of which involved backing the Israeli side in the Israeli-Palestinian conflict.