Israel authorized the construction of 625 new housing units in Pisgat Ze'ev, a Jewish neighbourhood of East Jerusalem in the occupied West Bank, dpa reported.
The plan was given the final go-ahead by an Interior Ministry committee, Israel Radio reported Thursday.
The ministry said the plan was first approved more than two years ago, but it took real estate companies time to make demanded changes to it.
The latest announcement of new Israeli construction in East Jerusalem - which the Palestinians want as the capital of their future state - comes as Palestinian President Mahmoud Abbas said Wednesday he hoped to hear from the US this week regarding efforts to relaunch direct peace talks with Israel.
Speaking as he laid the cornerstone for a new presidential palace in a small town north of Ramallah, Abbas said Palestinians had not yet received an answer from Washington regarding their demand that Israel freeze construction at its West Bank settlements and in East Jerusalem, before the peace talks may begin.
Direct Israel-Palestinian talks, renewed only in September after a hiatus of nearly two years, are currently in limbo after a partial, limited Israel settlement freeze expired on September 26.
Abbas has insisted the talks cannot resume until Israel renews the freeze, something Prime Minister Benjamin Netanyahu has refused to commit to publicly.
Netanyahu also refuses to freeze construction in East Jerusalem settlements such as Pisgat Ze'ev, which Israelis call an integral part of their unrecognized capital. Pisgat Ze'ev is one of some 12 Jewish neighbourhoods of Jerusalem which are built within the Israeli-declared municipal boundaries, but beyond the "green line" separating Israeli from West Bank territory.
The US has offered Israel incentives to declare a new, three-month freeze, but the offer has reportedly been held up as the sides try to work out guarantees.
Last month, Israeli authorities announced they had deposited for public review plans to build 1,345 housing units at Har Homa and Ramot, two other East Jerusalem settlements.