Israel plans to build 3,500 new homes for Jewish settlers in the occupied West Bank to cement its hold on Jerusalem.
Palestinians have warned that peace efforts are at risk following the reports.
The blueprint for construction between the Maaleh Adumim settlement and Arab East Jerusalem clash with the US-backed peace road map.
The plans have also weakened hopes for a breakthrough buoyed by a truce declared by Israel and the Palestinian Authority last month.
The road map requires a halt to settlement expansion in the West Bank and Gaza Strip.
US President George W Bush said in 2004 that Israel, which intends to quit occupied Gaza this summer, could expect to keep some West Bank settlement blocs under a final peace accord.
However, Mr Bush also expressed support for establishment of a Palestinian state that is viable and contiguous.
Israeli government sources said the Israeli President, Ariel Sharon, last week approved the construction plan, drawn up six years ago, for 3,500 new homes east of Jerusalem.
