"We will carry on building in Jerusalem and in all the places that are on the map of Israel's strategic interests," a defiant Mr Netanyahu said.
In another blow to the Palestinian Authority (PA) in the West Bank, Israel also announced it was this month withholding Palestinian tax revenues worth about $100 million (£62m) because of a $200m PA debt to the Israeli Electric Corporation.
Yasser Abed Rabbo, a senior Palestinian official, said confiscation of funds due to the authority was piracy and theft.
Stung by the UN General Assembly's upgrading of the Palestinians from observer entity to non-member state, Israel said it would build 3000 more settler homes in the West Bank and East Jerusalem, areas Palestinians want for a future state.
An Israeli official said the government also ordered "preliminary zoning and planning work" for further construction work that could divide the West Bank in two and further dim Palestinian hopes for a contiguous country.
At a cabinet meeting yesterday, Netanyahu said the government of Israel "rejects the General Assembly's vote".
The upgrade, approved overwhelmingly, fell short of full UN membership, which only the Security Council can grant. But it has significant implications because it could allow the Palestinians access to the International Criminal Court, where they could file complaints against Israel.