The 15-nation Council adopted yesterday the resolution by a vote of 14 in favour and with one abstention from the US.
In a rare step, the United States instead abstained, enabling the adoption of the first UN resolution since 1979 to condemn Israel over its settlement policy.
The resolution had been put forward by Malaysia, New Zealand, Senegal and Venezuela.
In the resolution, the Council reiterated its demand that Israel "immediately and completely cease all settlement activities in the occupied Palestinian territory, including East Jerusalem, and that it fully respect all of its legal obligations in this regard".
The adoption of the resolution and Washington's abstention was seen as a huge rebuke to Israel, which has traditionally been a staunch US ally.
Trump had put pressure on the Obama administration to veto the UN resolution critical of Israel.
A day before the vote, Trump said in a post on social network Facebook that the resolution being considered at the UN Security Council regarding Israel should be vetoed.
Following the adoption of the resolution, Trump made his displeasure clear, tweeting "As to the UN, things will be different after January 20," referring to the day when he is sworn in as the next US President.
"There is one president at a time," Ben Rhodes, White House deputy national security adviser, told reporters, dismissing Trump's criticism.
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"The settlement problem has gotten so much worse that it is now putting at risk the very viability of that two-state solution. The number of settlers in the roughly 150 authorized Israeli settlements east of the 1967 lines has increased dramatically.
Yet rather than dismantling these and other settler outposts, which are illegal even under Israeli law, now there is new legislation advancing in the Israeli Knesset that would legalize most of the outposts - a factor that propelled the decision by this resolution's sponsors to bring it before the Council," she said.
Outgoing UN Secretary-General Ban Ki-moon welcomed the adoption of the resolution which stated that the establishment of Israeli settlements in Palestinian territory occupied since 1967, have "no legal validity", constitute a "flagrant violation" under international law and are a "major obstacle" to a two-State solution and a just, lasting and comprehensive peace.
"The resolution is a significant step, demonstrating the Council's much needed leadership and the international community's collective efforts to reconfirm that the vision of two States is still achievable," the UN chief's spokesperson said in a statement.
Israel's Ambassador to the UN Danny Danon responded harshly to the American decision not to veto the UN Security Council resolution: "Neither the Security Council nor UNESCO can sever the tie between the people of Israel and the land of Israel".
Danon added that it was "expected" that Israel's greatest ally would act in accordance with the values that "we share and that they would have vetoed this disgraceful resolution".
Leading human rights group Human Rights Watch lauded the adoption of the resolution saying the US abstention is a welcome shift away from past practice of "using its Security Council veto to shield Israel from criticism despite longstanding US policy opposing settlements".
The Council vote "rebukes" those seeking to reverse universally accepted international law on the illegality of Israeli settlements in the West Bank.
UN Director at Human Rights Watch Louis Charbonneau said indications that Trump may change US policy on settlements "reinforces" the need for a steadfast Security Council position, adding that Malaysia, New Zealand, Senegal and Venezuela should be commended for pushing this resolution forward after Egypt "balked under political pressure before voting in favour of the final resolution".
The resolution called for immediate steps to prevent all acts of violence against civilians, including acts of terror, as well as all acts of provocation and destruction, and for accountability in that regard, as well as for both parties to act on the basis of international law, including international humanitarian law, and previous agreements and obligations, "to observe calm and restraint, and to refrain from provocative actions, incitement and inflammatory rhetoric".
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