A few things to read regarding the Israeli/US dispute, because there seem to be a lot of hidden forces which drove the incident and the response creating the current rift. The following pieces help put this incident in context and perhaps answer some of the questions about what the heck happened?
Question 1: How likely was this incident just an innocent mistake like Netanyahu said?
Prime Minister Benjamin Netanyahu was clearly embarrassed at the move by his interior minister, Eli Yishai, leader of the right-wing Shas Party, who has made Jewish settlement in East Jerusalem one of his central causes.
A statement issued in the name of the Interior Ministry but distributed by the prime minister’s office said that the housing plan was three years in the making and that its announcement was procedural and unrelated to Mr. Biden’s visit. It added that Mr. Netanyahu had just been informed of it himself.
Question 2: What led to the Israeli government's decision and what caused the Israelis to be so aggressive and bold in their announcement precisely when it would cause the greatest harm?
Shortly after Vice President Joe Biden’s arrival in Israel, Netanyahu and Jerusalem Mayor Nir Barkat were the headliners at Pastor John Hagee’s two-hour Christians United for Israel (CUFI) extravaganza at the Jerusalem Convention Center. Ambassador Michael Oren and Deputy Foreign Minister Daniel Ayalon were also in attendance. There was no ambiguity. It was a blatant and unabashed rejection of "dividing the land," filled with repeated references to Jerusalem as the undivided capital of the Jewish people.
So the Christian Zionist, John Hagee, who believes it is foretold that a major war in the Middle East is the sign of the start of the Apocalypse and believes he has been given the role to help create the conditions for this end was in Israel and tossed out the match.
Question 3: Why was the US response so forceful?
The Petraeus briefing: Biden’s embarrassment is not the whole story
The [Pentagon] briefers [briefing Joint Chiefs of Staff Chairman Adm. Michael Mullen] reported that there was a growing perception among Arab leaders that the U.S. was incapable of standing up to Israel, that CENTCOM's mostly Arab constituency was losing faith in American promises, that Israeli intransigence on the Israeli-Palestinian conflict was jeopardizing U.S. standing in the region, and that Mitchell himself was (as a senior Pentagon officer later bluntly described it) "too old, too slow ... and too late."
So it seems that just when the Pentagon was becoming increasingly unhappy with the lack of progress on the Israeli-Palestinian dispute, the Christian Zionists decided to throw another match on the smoldering Middle-Eastern fire. It's increasingly clear that some people really want war. We certainly live in dangerous times.