The Jerusalem municipality has approved the construction of 130 new homes in the east of the city.
The homes are to be built in Gilo neighbourhood on land captured from Jordan in the 1967 war.
Municipal spokesman Stephan Miller said on Wednesday the construction was approved by the city’s planning committee after the period to lodge objections to it had ended.
Israel regards West Jerusalem and occupied East Jerusalem as part of one united city. Housing applications there are dealt with on municipal level, usually without any government intervention.
However, the international community sees East Jerusalem as occupied territory, with the same status as the West Bank, and decries unilateral Israeli moves there.
The latest construction approval came 10 days after Israel raised international and Palestinian ire by including three locations in and near East Jerusalem in plans to build 600 homes.
Palestinians regard East Jerusalem as the capital of their future state and object vigorously to any Israeli construction there.
The Palestinian Authority has said it will not resume direct peace talks until and unless Israel halts all construction in its West Bank settlements and in East Jerusalem.
The Gilo project received initial approval in November 2010, in a move the Palestinians said was an attempt to further isolate Bethlehem from east Jerusalem. Gilo lies just a few kilometres north of Bethlehem.
‘New Year Message’
Wednesday’s approval did little to improve the mood between Israel and the Palestinians, who have not sat down for face-to-face talks for more than a year after direct negotiations collapsed following a dispute over settlements.
"I guess this is the New Year message that the government of Israel is sending us for 2012: ‘We will continue destroying the peace process and killing the two-state solution through continuing and escalating settlement activity’," remarked Saeb Erakat, a Palestinian negotiator.
"The Quartet and the international community must hold the government of Israel fully responsible for these policies if they want to save the peace process and the two-state solution," he said.
The Middle East Quartet, which includes top European Union, United States, United Nations and Russian diplomats, has been urging the two sides to return to direct negotiations with next to no success, with each party blaming the other for sabotaging peace efforts.
Last week, Britain, France, Germany and Portugal issued a joint statement condemning Israel’s accelerated settlement building, saying it sent a "devastating" message, and urged the Jewish state to reverse the plans.
On November 1, Israel’s inner cabinet decided to speed up construction of homes for Jews in Arab east Jerusalem and in other nearby settlements allegedly to punish the Palestinians for winning membership in the UN cultural agency, UNESCO.
Since then, Israel has issued announcements for 2,057 new homes in Arab east Jerusalem and 1,241 in the West Bank, official figures show.
More than 310,000 Israelis live in settlements in the occupied West Bank, and the number is constantly growing.
Another 200,000 live in a dozen settlement neighbourhoods in east Jerusalem.
(Agencies via Al Jazeera)