New homes will be built in the settlement of Gilo, near Bethlehem, and are expected to be given the green light by the district planning commission in coming days, Israeli military radio reported Sunday.
Speaking on the radio, municipal councillors confirmed the project, which was denounced by leftwingers but hailed by the right.
"There is no doubt that a green light for these constructions will deal a knockout blow to the peace process with the Palestinians," said Jerusalem city councillor Meir Margalit of the leftwing Meretz party.
Peace talks between Israel and the Palestinians have deadlocked over the issue of Jewish settlement in the occupied West Bank and east Jerusalem.
The Palestinians have refused to negotiate with Israel while it builds on land they want for their future state, but Israel has insisted on continuing settlement construction.
"Gilo is an integral part of Jerusalem. There can be no argument in Israel over construction in that neighbourhood," said Elisha Peleg, a municipal council member from the rightwing Likud party of Prime Minister Benjamin Netanyahu.
The project, planned by private firms, could take close to four years to complete because of the difficulties of building on the steep slopes on the outskirts of the West Bank city of Bethlehem.
And the planned construction is likely to attract strong international criticism.
In March 2010, Israeli Interior Ministry announced a plan to build 1,600 homes in Ramat Shlomo, an Orthodox Jewish neighbourhood in east Jerusalem.
The announcement, which came as US Vice President Joe Biden visited Israel, provoked fierce US opposition, and soured relations between Israel and Washington for months.
Israel captured east Jerusalem in the 1967 Six-Day War and later annexed it in a move the rest of the world never recognised. Israel considers the whole of Jerusalem to be its "eternal and indivisible" capital.
The Palestinians regard east Jerusalem as the capital of their promised state and fiercely oppose any attempts to extend Israeli control over it.
Since 1967, Israel has built several Jewish settlements in the eastern part of Jerusalem, with Gilo among the first of to be constructed.