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An Israeli planning committee on Wednesday granted final approval for the construction of 69 east Jerusalem settler homes, an official said, on the eve of a visit by US Secretary of State John Kerry.
The Palestinians said it demonstrated that Israel was not serious about Kerry's peace efforts, although an Israeli diplomatic source quickly sought to distance the government from the move.
"The municipal committee has today given its final approval for the construction of 69 homes in Har Homa in east Jerusalem," councillor Meir Margalit told AFP.
The approval was granted by the planning committee just before Kerry took off for Amman on his fifth visit to the region since February as he steps up efforts to draw Israel and the Palestinians back into direct negotiations.
"This a blind provocation against Kerry," said Margalit, a member of the leftwing Meretz party.
"It proves just how much the government of Bibi (Benjamin) Netanyahu wants peace," he retorted, using the Israeli prime minister's nickname.
Har Homa is in the southern sector of Arab east Jerusalem, which was occupied by Israel during the 1967 Six-Day War then annexed in a move the international community has not recognised.
The contentious decision was likely to set tempers flaring a day before Kerry travels to Jerusalem for talks with Netanyahu.
He was expected to meet with Abbas in Amman on Friday.
US officials travelling with Kerry declined to comment on the announcement as they boarded his plane in Kuwait City ahead of a flight to Amman.
The Palestinians said the move demonstrated Israel's lack of commitment to peace.
"Israel is sending message after message to Kerry that settlement is their response to any (peace) initiative," senior Palestinian official Hanan Ashrawi told AFP.
"And then they blame the Palestinians for not coming to the negotiating table."
The Palestinian leadership had repeatedly asked Washington to look at Israel's actions on the ground, but they were turning a blind eye, she charged.
"Many times we asked the Americans to look at what Israel is doing on the ground. The United States is playing blind and deaf about Israel's actions and its declarations."
Ashrawi was referring to a growing chorus of statements from senior Israeli government figures, several from Netanyahu's Likud party, in which they expressed opposition to the idea of a two-state solution.
But an Israeli diplomatic source insisted there was no government involvement in the Har Homa project, saying it was a question of "private construction on private land and not on state land".
"This is not a government project and there were no government tenders issued," he told AFP.
But Peace Now, Israel's settlement watchdog, dismissed his remarks, saying such a move, on the eve of Kerry's arrival, proved the "true policy" of the Israeli government was "to continue to develop the settlements in east Jerusalem and in the West Bank".
"Construction can now begin within a matter of a few weeks," it said in a statement which indicated that since March 2013, Israel had advanced plans for at least 2,480 West Bank settler homes.
"The fact that we haven't seen any new tenders for construction in four months is not indicative of a serious commitment by the Israeli government to go to peace.
"Rather the government is continuing to allow and promote the creation of facts on the ground which will be devastating for the two-state solution," it said.
Ahead of his departure from Kuwait, Kerry said he was "confident" both sides were keen to push ahead with peace talks.
"I believe they believe the peace process is bigger than any one day or one moment," he told reporters.
Settlement construction was the issue which brought about a collapse of direct peace talks in September 2010 just weeks after they were started when Israel failed to renew a freeze on all new West Bank construction.
The Palestinians have said they will not return to talks without a complete halt to settlement construction and accept the 1967 lines as the basis for negotiations, while Israel has hit back saying it would only negotiate if there were no such "pre-conditions".
Har Homa is particularly contentious area on Jerusalem's southern outskirts where construction is likely to have a serious impact on the sector's boundary with the West Bank.
Building work at Har Homa began in 1997 during Netanyahu's first term as premier, in a move which led to the breakdown of peace talks.