US President Barack Obama has told Israeli Prime Minister Benjamin Netanyahu of Washington's deep concerns over an Israeli plan to build 2,600 new settler homes in East Jerusalem.

Obama raised the development in face-to-face talks in the Oval Office on Wednesday, White House spokesman Josh Earnest said.

"The United States is deeply concerned by reports the Israeli government has moved forward" with planning for settlements in a "sensitive area" of East Jerusalem, Earnest said.

Earnest said Israel would send a "very troubling message" by following through with the settlement project, and in noticeably blunt language said that the step was contrary to Israel's stated goal of negotiating a permanent final status agreement with the Palestinians.

"This development will only draw condemnation from the international community, [and] distance Israel from even its closest allies," Earnest said.

He added that it would also "poison the atmosphere" - not only with the Palestinians but with "the very Arab governments" with which Netanyahu had said he wanted to build relations.

All Israeli settlements on occupied Palestinian territory are illegal under international law.

Netanyahu and Obama were meeting for the first time since their subordinates swapped some of the most pointed rhetoric in years between the allies, over the Gaza crisis.

Obama said that he also wanted to discuss the rebuilding of Gaza with the Israeli leader following the war with Hamas this year that killed more than 2,100 Palestinians, most of them civilians, and 73 Israelis.

"We have to find ways to change the status quo so that both Israeli citizens are safe in their own homes and school children in their schools, from the possibility of rocket fire, but also that we don't have the tragedy of Palestinian children being killed as well," Obama said.

Discussing other issues in the Middle East, Netanyahu backed Obama's campaign against the Islamic State in Iraq and the Levant group in Syria and Iraq, but said the effort to prevent Iran obtaining a nuclear weapon was "even more critical".

Netanyahu had earlier used a photo opportunity with journalists in the Oval Office to deliver a broad hint that his government remained concerned about the direction of talks between Iran and world powers on constraining Tehran's nuclear programme.