The Foreign Affairs Minister backed international calls for Israel to rescind the proposal in the interests of peace.
Mr Gilmore said the scale of the plans suggests that Israel has no real intention of desisting from expanding and building new settlements, which are illegal under international law.
He said: "This latest announcement conflicts very much with the stated commitment of prime minister (Benjamin) Netanyahu and his government to making progress through peace talks and achieving a two-state solution. I am particularly troubled by the stated intention to proceed with construction in the E1 area of the West Bank which I visited last January.
"Any settlement construction in this strategically important area could only be interpreted as an intention to divide the West Bank in two while also further separating Palestinian East Jerusalem from its natural hinterland."
Mr Netanyahu announced the new settlement plan after the United Nations General Assembly overwhelmingly backed a call for de facto recognition of a Palestinian state.
The foreign ministries of Britain, France and Sweden have called in their Israeli ambassadors as governments across Europe voiced dismay at the implications of the settlement scheme for the peace process.
Mr Gilmore said last week's decision by the UN General Assembly to grant Observer State status to Palestine should have provided much-needed impetus for the resumption of substantive peace negotiations.
He added: "It should not be used as grounds for creating further serious obstacles in the path of peace. It is only through direct talks that a just and honourable peace agreement, based on the two-state solution, can be achieved. I appeal to both sides to desist from any activity which detracts from this vital objective or makes the resumption of peace talks more difficult.
"I would urge the Israeli government to rescind this latest announcement of settlement construction and, in so doing, to demonstrate that it is truly committed to the achievement of a peace agreement based on the two-state solution."