File Photo: Israeli settlers carrying assault rifles gather next to an inflatable children s attraction in the newly-established wildcat outpost of Eviatar near the northern Palestinian city of Nablus in the occupied West Bank, on July 1, 2021. AFP
Half the "new neighbourhood" comprising 1,738 housing units will be in the city's annexed east, the Israeli NGO Peace Now said.
"If it weren't for the war (between Israel and Hamas), there would be a lot of noise. It's a highly problematic project for the continuity of a Palestinian state between the southern West Bank and east Jerusalem," Peace Now's Hagit Ofran told AFP.
In a statement, the NGO said: "Half of the Lower Aqueduct neighbourhood is situated beyond the Green Line in east Jerusalem, and the other half is within the Green Line.
"However, its strategic location between the neighbourhoods of Givat Hamatos and Har Homa makes it particularly problematic from a political standpoint."
The Green Line refers to the 1949 Armistice Line established at the end of the war that accompanied Israel's founding a year earlier.
It divided the city between Israeli-governed west Jerusalem and east Jerusalem, which was administered by Jordan until the 1967 Six-Day War.
Israel occupied east Jerusalem in 1967 and later annexed it in a move never recognised by the United Nations.
The Palestinian foreign ministry said on Tuesday that Israel was "taking advantage of international concern over the war in Gaza to approve the construction of a settlement in occupied Jerusalem".
It was part of a plan to "flood Jerusalem with settlements and settlers" and "separate it from its Palestinian surroundings", the ministry said.
According to the Ir Amin anti-settlement NGO, around 300,000 Palestinians and 200,000 Israelis live in east Jerusalem.
Israeli settlements in occupied territories are illegal under international law.
In 2016 the UN Security Council adopted a resolution condemning Israeli settlement building.
"The establishment by Israel of settlements in the Palestinian territory occupied since 1967, including East Jerusalem, has no legal validity and constitutes a flagrant violation under international law," it said.
It was also "a major obstacle to the achievement of the two-State solution and a just, lasting and comprehensive peace", the resolution added.