Israeli leaders have approved plans to build some 800 housing units for settlers in and around East Jerusalem, Israeli media reports said.
The news comes as the United States is preparing to offer Israel the largest military aid package in history, with reports suggesting the current US$3 billion a year in aid could rise to US$4 billion, or US$40 billion over 10 years.
No formal announcement was made late on Sunday, but the liberal Haaretz newspaper quoted an unidentified Israeli official as saying the move was coupled with a decision—which drew right-wing criticism—to erect 600 homes for Palestinians in an Arab neighborhood of Jerusalem.
According to the reports, 560 homes will be built in Maale Adumim, a large settlement in the occupied West Bank near Jerusalem.
Another 140 dwellings will go up in Ramot and about 100 in Har Homa and Pisgat Zeev - settlements on the outskirts of Jerusalem that were built on land Israel occupied in a 1967 war.
The reports said the 600 homes for Palestinians would be built in Beit Safafa, an Arab neighborhood that straddled the pre-1967 war line between Israeli-controlled West Jerusalem and the West Bank.
Criticizing that plan, Israel's minister for Jerusalem affairs, Zeev Elkin, wrote on Facebook: "Anyone who cares about a Jewish majority in the capital of Israel can't promote construction for the Arab population alone."
Haaretz quoted an unidentified Israeli official as saying the new homes slated for the settlements were aimed at "sweetening the pill" for right-wingers upset by the construction plans for Beit Safafa and seeking a strong response to recent deadly Palestinian attacks on Israelis.
Israel annexed East Jerusalem after its capture in the 1967 conflict and considers all of Jerusalem its capital, a claim that has not won international recognition. Palestinians want East Jerusalem to be the capital of the state they seek to create in the West Bank and Gaza Strip.
Most countries consider Israeli settlements on occupied land to be illegal, in accordance with international law.
Earlier on Sunday, the U.N.'s special coordinator for Middle East peace cautioned that a two-state solution to the Israeli-Palestinian conflict is slipping away.
Nickolay Mladenov issued the warning after a report released on Friday by Quartet of peace mediators—the United States, European Union, United Nations and Russia—called on Israel to stop its policy of building settlements and restricting Palestinian development.
The Quartet's report also urged the Palestinian Authority, which exercises limited self-rule in the West Bank, take steps to end incitement to violence against Israelis, condemn "all acts of terrorism" and do more to combat them.
Peace talks collapsed in April 2014 and Israeli-Palestinian violence has surged in recent months.