Netanyahu announced the probe after a meeting with ministers Saturday.
The Israeli announcement of construction in East Jerusalem came during Biden's visit last week.
It complicated U.S. efforts to set up so-called proximity talks between the Israelis and Palestinians, the latest attempt to nudge the two sides back toward talking directly.
U.S. Secretary of State Hillary Clinton called the timing of the announcement "insulting" to the United States.
The construction, announced Tuesday, will be in the Ramat Shlomo neighborhood, located in disputed territory in East Jerusalem. The Israeli Interior Ministry denies the territory is in East Jerusalem.
Biden arrived in Israel on Monday, meeting first with Israeli President Shimon Peres at his official residence in Jerusalem and then with Prime Minister Benjamin Netanyahu.
Biden emphasized the close relationship between the United States and Israel as he met with Israeli leaders Tuesday, a visit that also touched on relations with the Palestinians and Iran.
However, later Tuesday, after getting word of the settlement announcement, Biden said the United States condemned Israel's decision to build the 1,600 housing units in the Jerusalem neighborhood, calling it "a step that undermines the trust we need right now."
The Israeli Interior Ministry said the construction plan was approved by a district committee, and the public can express objections to it over the next 60 days.
"I mean it was just really a very unfortunate and difficult moment for everyone -- the United States, our vice president who had gone to reassert our strong support for Israeli security -- and I regret deeply that that occurred and made that known," Clinton said Friday.
Clinton added that she has no reason to believe that Netanyahu knew about the announcement during Biden's visit, but added, "He is the prime minister. Like the president or secretary of state ... ultimately, you are responsible."
The controversy over Israel's announcement came just a day after George Mitchell, the Obama administration's special envoy for Middle East peace, announced that Israeli and Palestinian leaders had accepted indirect talks.
Mitchell said Monday that the two sides, with him acting as intermediary, had begun to discuss the "structure and scope" of the talks.
"I will return to the region next week to continue our discussions," Mitchell said. "As we've said many times, we hope that these will lead to direct negotiations as soon as possible."
Negotiations between Palestinians and Israelis have been stalled for more than a year, despite the Obama administration's attempt to move toward a resolution of the decades-old Israeli-Palestinian conflict.
Under current agreements between Israel and the Palestinian Authority, Israel maintains full control over the West Bank and its borders, while the Palestinian government oversees administration of major population centers.
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