Israel, which has entered a new round of peace talks with the Palestinians, Sunday announced invitation for bids to build 1,200 housing units in east Jerusalem and the West Bank, Xinhua reported.
The Palestinians largely condemned the Israeli decision. Mohamed Ishtaya, a Palestinian negotiator, said the move "is a deliberate blow on the international and US efforts exerted to achieve peace in the region".
He added that "peace and settlements are contradictory and can never meet".
Halting settlement was a major Palestinian demand to resume the stalled peace talks, he stressed.
US State Department last week announced that the second round of direct peace talks would be held between Israeli and Palestinian negotiators in Jerusalem Wednesday.
The Palestinians agreed to resume the talks after Israel agreed to free 104 Palestinian prisoners from its jails.
The Palestinians are hoping that US Secretary of State John Kerry would ask the Israeli government to end settlement expanding.
Ishtaya said the Palestinians have presented a protest to Kerry about Israel's fresh move.
Hanan Ashrawi, a member of the executive committee of Palestine Liberation Organisation (PLO), said in a press statement that Israel "is not stopping its consecutive strikes against the international efforts... Such strikes are aiming at blocking the negotiations."
"Israel is trying to empty the process of the US-sponsored peace negotiations before it is really launched," Ashrawi said.
He added: "After this serious decision, I don't believe that the Palestinians are in need for meaningless negotiations with Israel."
Earlier on Sunday, Palestinian President Mahmoud Abbas and US Special Peace Envoy to the Middle East Martin Indyk met in Ramallah to prepare for the second round of peace talks.
A Palestinian source said that Abbas told Indyk that the settlement building in the West Bank and east Jerusalem "will undermine the principle of the two-state solution and undermine the US efforts to revive the peace process."