A planning committee on Wednesday granted final approval for the construction of 69 east Jerusalem homes, an official said.
Arabs from the Palestinian Authority (PA) said the move demonstrated that Israel was not serious about U.S. Secretary of State John Kerry's peace efforts, although an Israeli diplomatic source quickly sought to distance the government from the move.
"The municipal committee has today given its final approval for the construction of 69 homes in Har Homa in east Jerusalem," councillor Meir Margalit told AFP.
The approval was granted by the planning committee just before Kerry took off for Amman on his fifth visit to the region since February as he steps up efforts to draw Israel and the Palestinians back into direct negotiations.
"This a blind provocation against Kerry," said Margalit, a member of the leftwing Meretz party. "It proves just how much the government of Bibi Netanyahu wants peace," he said.
Kerry is expected to meet with Abbas in Amman on Friday.
US officials travelling with Kerry declined to comment on the announcement as they boarded his plane in Kuwait City ahead of a flight to Amman.
"Israel is sending message after message to Kerry that settlement is their response to any (peace) initiative," senior Palestinian official Hanan Ashrawi told AFP.
"And then they blame the Palestinians for not coming to the negotiating table."
"Many times we asked the Americans to look at what Israel is doing on the ground. The United States is playing blind and deaf about Israel's actions and its declarations."
But an Israeli diplomatic source insisted there was no government involvement in the Har Homa project, saying it was a question of "private construction on private land and not on state land".
“This is not a government project and there were no government tenders issued," he told AFP.
But Peace Now, Israel's settlement watchdog, dismissed his remarks, saying such a move, on the eve of Kerry's arrival, proved the "true policy" of the Israeli government was "to continue to develop the settlements in east Jerusalem and in the West Bank".
"Construction can now begin within a matter of a few weeks," it said in a statement which indicated that since March 2013, Israel had advanced plans for at least 2,480 homes for Jews in the ancient Jewish heartland of Judea and Samaria.