Israel gave preliminary approval for 130 new apartments in disputed east Jerusalem on Monday, the area the Palestinians want as the capital of their state.
The decision comes as peace talks between Israel and the Palestinians are at a standstill over settlement building in the occupied Palestinian territories.
City Hall spokesman Elie Isaacson said the new housing was approved for Gilo, a Jewish housing development in east Jerusalem. The project, which would switch a planned hotel into an apartment complex, still needs final approval from Israel's Interior Ministry to proceed.
"As far as we know there is no freeze in Jerusalem. Jerusalem municipality is continuing to build in all parts of the city," Isaacson said.
Peace talks resumed in September but collapsed shortly after as a 10-month moratorium on West Bank settlement building ended.
Israel says it is waiting for written diplomatic and security assurances from Washington before committing to a new settlement moratorium in the West Bank. Israeli officials have said east Jerusalem will not be subject to any construction freeze.
Palestinians say they won't restart negotiations so long as Israel continues to build on their territory. They say continued Israeli settlement construction on their land shows that Israel is not serious about pursuing peace.
"It's very clear cut that Israel has just decided to defy the international will and Israel has made sure that it opts for the settlement enterprise and not political settlements," said Husam Zomlot, a spokesman for the Palestinian government.
Palestinians want the eastern part of Jerusalem as the capital of their future state. Israel captured east Jerusalem in the 1967 war, and considers it an inseparable part of its capital.