Israel's far-right Minister for Finance Bezalel Smotrich has announced that work will start on a long-delayed settlement to divide the West Bank and cut if off from East Jerusalem.
His office said the move would "bury" the idea of a Palestinian state.
The Palestinian government, allies and campaign groups condemned the scheme, calling it illegal and saying the fragmentation of territory would rip up any internationally backed peace plans for the region.
Standing at the site of the planned settlement in Maale Adumim, Mr Smotrich said that Prime Minister Benjamin Netanyahu and US President Donald Trump had agreed to the revival of the development, though there was no immediate confirmation from either.
"Whoever in the world is trying to recognise a Palestinian state today will receive our answer on the ground. Not with documents nor with decisions or statements, but with facts. Facts of houses, facts of neighbourhoods," Mr Smotrich said.
Israel froze construction plans at Maale Adumim in 2012, and again after a revival in 2020, because of objections from the US, European allies and other powers who considered the project a threat to any future peace deal with the Palestinians.
The move could further isolate Israel, which has watched some of its Western allies condemn its military offensive in Gaza and announce they will recognise a Palestinian state.
Palestinians fear that settlement building in the West Bank - which has sharply intensified since the 2023 Hamas attack on Israel that led to the Gaza war - will rob them of any chance to build a state of their own.
In a statement, headlined "Burying the idea of a Palestinian state," Mr Smotrich's spokesperson said the minister had approved the plan to build 3,401 houses for Israeli settlers between an existing settlement in the West Bank and Jerusalem.
Mr Smotrich said the plan would take effect on Wednesday.
Breaking the Silence, a rights group established by former Israeli soldiers, criticised the minister, accusing him of encouraging West Bank settlement activity while the world's attention is on Gaza.
This land grab and settlement expansion will not only further fragment the Palestinian territory, but will further entrench apartheid," it said.
A spokesperson for Palestinian President Mahmoud Abbas called on the United States to pressure Israel to stop settlement building.
European Commission spokesperson Anitta Hipper said: The EU rejects any territorial change that is not part of a political agreement between involved parties. So annexation of territory is illegal under international law".
Norwegian Foreign Minister Espen Barth Eide said the move showed that Israel "seeks to appropriate land owned by Palestinians in order to prevent a two-state solution".
Qatar, which has mediated between Hamas and Israel in efforts to secure a ceasefire in Gaza, condemned Mr Smotrich's actions as a "blatant violation of international law".
Peace Now, which tracks settlement activity in the West Bank, said there were still steps needed before construction.
However, if all were taken, infrastructure work could begin within a few months, and house building in about a year.
"The E1 plan is deadly for the future of Israel and for any chance of achieving a peaceful two-state solution.
"We are standing at the edge of an abyss, and the government is driving us forward at full speed," Peace Now said in a statement.
Palestinians were already demoralised by the Israeli military campaign which has killed more than 61,000 people in Gaza, according to local health authorities, and fear Israel will ultimately push them out of that territory.
About 700,000 Israeli settlers live among 2.7 million Palestinians in the West Bank and East Jerusalem.
Israel annexed East Jerusalem in a move not recognised by most countries, but has not formally extended sovereignty over the West Bank.
The United Nations and most world powers say settlement expansion has eroded the viability of a two-state solution by fragmenting Palestinian territory.
The proposal envisages a Palestinian state in East Jerusalem, the West Bank and Gaza, existing side by side with Israel.
Israel cites historical and biblical ties to the area and says the settlements provide strategic depth and security.
Most of the global community considers all settlements illegal under international law.
Israel rejects this interpretation, saying the West Bank is "disputed" rather than "occupied" territory.
In June, the UK, Canada, Australia and New Zealand imposed sanctions on Mr Smotrich and another far-right minister who advocates for settlement expansion, accusing both of them of repeatedly inciting violence against Palestinians in the West Bank.
Mr Smotrich's popularity has fallen in recent months with polls showing his party, which largely draws its support from settlers, would not win a single seat if parliamentary elections were held today.
