An Israeli official said Tuesday Prime Minister Benjamin Netanyahu has approved the marketing of land for 454 houses in two Jewish settlements in East Jerusalem.
The project has been frozen for several years to avoid angering Israel's Western allies.
One of the settlements is Ramat Shlomo which is in land the Palestinians want as part of a future state. The Palestinian Authority condemns Israeli construction plans as illegal and aimed strictly at stopping an independent state.
U.S. Vice President Joe Biden was in Israel in 2010 when plans for building in Ramat Shlomo were first announced. He publicly criticized Israel for its plans and embarrassed its government during what was supposed to have been a diplomatic mission.
But the U.S. policy towards Jewish settlement activity has not changed.
"We view this kind of activity as illegitimate and counterproductive to the cause of peace," State Department spokesman Mark Toner said Tuesday. "And we will remain unequivocally opposed to these kinds of unilateral steps that, frankly, seek to prejudge the outcome of any negotiations."
Jewish settlement activity has been one of the issues that has sparked violent Palestinian protests and attacks on Israelis. Critics of settlements call them a major impediment to peace.
Israel has said the settlements are necessary for its security and say the Palestinians must recognize Israel's right to exist if there is ever to be a peace deal.