Israel is inviting contractors to build almost 1,200 new homes in occupied territory claimed by the Palestinians.
The controversial move comes three days before Israeli-Palestinian peace talks are set to resume in Jerusalem.
Israeli Housing Minister Uri Ariel gave final approval for the new homes Sunday. He is seeking bids for about 800 apartments in Jewish neighborhoods of East Jerusalem and another 400 units in four West Bank settlements.
Palestinian officials criticized the announcement, accusing Israel of bad faith ahead of Wednesday's planned meeting of Israeli and Palestinian peace negotiators in Jerusalem. Israel approved the release of 26 Palestinian prisoners Sunday in advance of the talks.
Palestinians claim East Jerusalem and the West Bank for a future independent state. They say Israeli settlement expansion will make it harder for them to achieve that.
"We urge the Israeli government to stop these settlement activities and give the peace process the chance it deserves in order to reach the two-state solution, said Chief Palestinian negotiator Saeb Erekat.
The U.S. government has long refused to accept the legitimacy of Israeli settlement activity. It calls on both Israelis and Palestinians to avoid actions that complicate negotiations.
Ariel rejected that criticism, saying "no country in the world takes orders from other states about where it can build." He said Israel will continue settlement activity as the "right thing" to do for Zionism and the economy.
Also Sunday, Israel approved the release of 26 Palestinian prisoners -- the first of about 100 prisoners to be freed. Israel agreed to release the prisoners as a Palestinian condition to revive peace talks. Many of them have been jailed for decades for carrying out deadly attacks on Israelis.
Some of the more conservative members of the Israeli cabinet object to the prisoner release, calling it a reward for terrorism.