The Israeli Interior Ministry has approved the construction of new housing in East Jerusalem.
The 1,100 new housing units at Gilo will include public buildings, a school and homes for young couples, although the plan is subject to a 60-day discussion period.
The decision was criticised by left-wing groups in Israel and the Palestinian negotiator Saeb Erekat, who said it represented a series of "no's to the resumption of peace talks".
Prime Minister Benjamin Netanyahu said this week in an interview with the Jerusalem Post that the ten-month settlement freeze had yielded no progress on the peace process.
The Palestinian president submitted a unilateral bid for statehood at the UN on Friday, despite repeated calls by Israel and the US for it to return to negotiating table instead.