The Palestinians claim east Jerusalem for a future capital and demand all construction there stop before negotiations resume. The 24-unit project is being developed in an Arab neighborhood by Irving Moskowitz, an American Jew who has generously funded Jewish settlers determined to cement Israel's hold on contested areas of the holy city.
The latest project is potentially even more contentious than others because it is not in any of the established Jewish neighborhoods. Instead, it is located in the heart of a predominantly Arab area of the city.
Jerusalem is the most explosive issue between Israel and the Palestinians, and the new buildings would be located in one of its most volatile sites, just outside the walled Old City with its Christian, Muslim and Jewish shrines.
Stephan Miller, spokesman for Jerusalem Mayor Nir Barkat, confirmed that Jerusalem's local planning committee approved the project on Monday, clearing the way for construction to begin.
Palestinian negotiator Saeb Erekat condemned the move "in the strongest possible terms." He said if Israel wants to resume peace talks, "they must announce a total cessation of settlement activities" in east Jerusalem and the West Bank. Israel committed to a full settlement freeze in 2003 under an internationally backed peace plan.
In another development, Palestinians symbolically burned a large pile of products made in Jewish settlements after declaring a boycott last month. After throwing a carton on the fire, Prime Minister Salam Fayyad said he was "determined to clean the Palestinian marketplace from settler products."
In violence late Tuesday, a Palestinian militant was killed and two others wounded in an Israeli airstrike in southern Gaza. Abu Mujahed, a militant spokesman, said Palestinians opened fire on soldiers on the Israeli side of the border, and Israel hit back with the airstrike.
In late November, Israeli Prime Minister Benjamin Netanyahu announced that construction in Jewish West Bank settlements would slow down for 10 months, but said building in east Jerusalem would proceed without restrictions.
An official in Netanyahu's office said the decision to build in east Jerusalem was made by municipal authorities and did not require involvement by the prime minister. He could not be identified under civil service regulations.
Israel captured east Jerusalem, along with the West Bank, from Jordan in the 1967 Mideast war.
Israel does not consider construction in east Jerusalem to be settlement activity because it annexed the area immediately after its capture.
The international community, like the Palestinians, does not recognize the annexation and views the Jewish neighborhoods built in east Jerusalem as settlements. Some 180,000 Jews live in those neighborhoods, alongside an estimated 250,000 Palestinians.
The Obama administration's special Mideast envoy, George Mitchell, is due in the region in the next few days to try to break the negotiations logjam.
Netanyahu and Palestinian President Mahmoud Abbas have both met in recent days with Egyptian President Hosni Mubarak in an effort to prod things along. But so far, there has been no sign that the two sides are moving any closer.
The Palestinians have not relaxed their demand for a complete settlement freeze in the West Bank and east Jerusalem. They also insist that talks resume where they left off under Netanyahu's predecessor, Ehud Olmert, who proposed sharing Jerusalem and ceding wide swaths of the West Bank to a future Palestinian state.
Israel says it has no preconditions for talks and is willing to immediately discuss all outstanding issues. But Netanyahu has said repeatedly that Israel does not intend to share Jerusalem and historically has opposed giving up all the West Bank land the Palestinians claim.
