Prime Minister Benjamin Netanyahu has authorised construction of hundreds of new homes in Jewish settlements in the West Bank and east Jerusalem.
The government presented the move as a response to a series of deadly Palestinian attacks against Jewish settlers.
The Palestinians have long viewed settlement construction as the biggest obstacle to the stalled peace process.
An Israeli official on Tuesday said construction would include 560 new homes in Maale Adumim, just outside Jerusalem, as well as nearly 200 in the city itself.
The plan also called for over 600 new homes in an Arab neighbourhood of east Jerusalem.
The official spoke on condition of anonymity because he was not authorised to discuss the matter with reporters.
Israel captured the West Bank and east Jerusalem in the 1967 war.
Most of the world opposes settlement construction in these areas, where the Palestinians hope to establish an independent state.
UN Secretary-General Ban Ki-moon said the Israeli plans raise "legitimate questions" about the country's long-term intentions.
Palestinian official Hanan Ashrawi said Israel is "bent on destroying the viability, integrity and territorial contiguity of a future Palestinian state."
Palestinians have carried out dozens of attacks since September, killing 34 Israelis and two visiting Americans. Some 200 Palestinians were killed during the same period.
