A peaceful future between Israelis and Palestinians is now in "jeopardy," according to US Secretary of State John Kerry.
Explaining why America did not veto a UN resolution demanding an end to Israeli settlement building, Kerry said the US could not have done it "in good conscience".
Kerry said the resolution made clear both Israel and the Palestinians needed to act now to "preserve the possibility of peace".
He added there is "still a way forward if responsible parties are willing to act".
US Secretary of State John Kerry has said a two-state solution is the "only way" to achieve lasting peace between Israel and Palestinians.
Delivering a farewell speech in Washington, Kerry maintained that President Obama had been "deeply committed" to Israel and its security.
Kerry added that commitment had "guided" Obama's pursuit of peace in the Middle East.
"The two-state solution is the only way to achieve a just and lasting peace between Israelis and Palestinians," Kerry said.
"It is the only way to ensure Israel's future as a Jewish and democratic state - living in peace and security with its neighbours."
Israeli Prime Minister Benjamin Netanyahu has thanked incoming President Donald Trump for his "clear-cut support" for the Middle Eastern nation.
Netanyahu tweeted that Trump had shown his nation "warm friendship" -hours after the President-elect used social media to chide Barack Obama for his stance towards Israel.
Secretary of State John Kerry is set to give a speech on Wednesday addressing international opposition to Israeli settlement building.
Trump tweeted earlier on Wednesday that the world should not continue to treat Israel with "such total disdain".
In response, Netanyahu tweeted:
US President-elect Donald Trump today chided the Obama administration for its stance toward Israel.
John Kerry, the US Secretary of State, will give a speech later today addressing international opposition to Israeli settlement building.
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Israeli Prime Minister Benjamin Netanyahu has summoned the US and British ambassadors to Israel and eight other envoys to be reprimanded amid a row with the UN.
US ambassador Daniel Shapiro was particularly called to discuss the US decision to abstain in a UN Security Council resolution demanding an end to Israeli settlement-building.
The White House has denied an allegation from Netanyahu that President Obama had conspired with the Palestinians to push for the resolution's adoption.
The envoys from 10 of the 14 countries that voted for the resolution and have embassies in Israel were summoned to the foreign ministry, namely China, Russia, France, Egypt, Japan, Uruguay, Spain, Ukraine and New Zealand.
The Israeli prime minister said the country would stop funding for a number of UN bodies deemed as 'hostile' to Israel.Read the full story ›
Israel Prime Minister Benjamin Netanyahu has said he looks forward to working with President-elect Donald Trump after being "failed" by the Obama administration.
In a statement, he said: "The Obama administration not only failed to protect Israel against this gang-up at the UN, it colluded with it behind the scenes.
"Israel looks forward to working with President-elect Trump and with all our friends in Congress, Republicans and Democrats alike, to negate the harmful effects of this absurd resolution."
US Secretary of State John Kerry has called on Israel and Palestinians to advance prospects of a two-state solution.
He said the US did not agree with every aspect of the resolution, but the UN measure "rightly condemns violence and incitement and settlement activity and calls on both sides to take constructive steps to reverse current trends and advance the prospects for a two-state solution."
The Palestinian Ambassador to the UN has hailed Friday's vote and said it will provide "peace for Palestine, peace for Israel, peace for the Middle East and peace for our world."
Addressing Council members after the vote, Riyad Mansour said: "The council's action, while long overdue, is timely, necessary and important."
We express our appreciation to all council members supporting this resolution... they have adopted this resolution on behalf of the international community, reflecting the long-standing global consensus on the matter.
Over the years, we have made countless appeals to the Council to uphold this charter - insisting on the need for concerted action to confront Israel's oppression of the Palestinian people and relentless colonisation of our land under half-a-century foreign occupation.
The Palestinians have long demanded an independent state in the West Bank, Gaza and East Jerusalem - areas Israel captured in a 1967 war.
Mansour described Palestinians as "a defenceless civilian population denied their rights, dignity and humanity."
"Urgent efforts are needed to reverse the dangerous negative trends... to advance our collective efforts to end the Israel occupation that began in 1967, and achieve freedom, rights and justice for the Palestinian people - including the Palestine refugees."
He added: "Today's resolution may rightly be seen as a last attempt to preserve the two-state solution and revive the path for peace."
A senior Israeli politician has accused the UN Security Council of "hypocrisy" after it voted to stop the country building new settlements on occupied Palestinian territory.
Danny Danon, the Israeli ambassador to the council, said the "evil" vote was a "victory for terror, a victory for hatred and violence".
"Who gave you the right to issue such a decree, denying our eternal rights in Jerusalem?" he added.
While thousands are being massacred in Syria, this council wasted valuable time and effort condemning the democratic state of Israel for building homes in the historic homeland of the Jewish people.
We have presented the truth time and again to this council, and implored you not to believe the lies presented in this resolution.
By voting 'yes', in favour of this resolution, you have in fact voted 'no'. You voted no to negotiations, you voted no to progress, and a chance of better lives for Israelis and Palestinians. And you voted no to the possibility of peace.