About 530 of the new homes are to be built in the ultra-Orthodox settlement of Beitar Elit near Bethlehem, 11 in the settlement of Maaleh Adumim and another 24 in Ariel, the ministry, the Israeli housing ministry announced on Thursday.
The chief Palestinian negotiator Saeb Erakat warned that the moves were "killing" attempts for a two state settlement - an outcome which some Israelis warn could have devastating consequences for the Jewish state.
Palestinians have long feared that the growth in Israeli settlements which pockmark the maps of the West Bank and Gaza Strip were undermining the viability of any future independent state.
The Israeli government is obliged under the terms of the "road map" for peace - a blueprint endorsed by both the Palestinians and Israelis which would lead to a two-state settlement by 2005 - to halt all settlement activity.
Yossi Beilin, a former Israeli minister who was one of the chief architects of the Oslo peace accords, said the latest settlement announcement appeared designed to scupper such a solution.
"Settlement activity is ideologically motivated in order to prevent a two state settlement," Beilin told AFP. "This activity is working against it."
Peres' demographic warning
Former Israeli premier Shimon Peres, who was awarded the Nobel Peace Prize in 1994 for his work on the Oslo accords, warned recently that the Palestinians and Arab Israelis were winning the demographic race.
"If a division of territory is not effected within a decade, the Arab minority will have become an Arab majority. Israel will no longer be a Jewish state - or (it will) stop being a democratic state"
Former Israeli prime minister
"If a division of territory is not effected within a decade, the Arab minority will have become an Arab majority. Israel will no longer be a Jewish state - or (it will) stop being a democratic state," Peres argued in the International Herald Tribune.
"A Jewish state is not a religious notion but a democratic one: the creation of one place in the world where the Jewish people are in the majority."
William Burns, the US assistant secretary of state whose brief covers the Middle East, also said in a speech earlier this week that the demographic trends meant it was vital for Israel to agree to a two-state settlement.
"As Israeli settlements expand, and their populations increase, it becomes increasingly difficult to see how the two peoples will be separated into two states," said Burns.
"The fact is that settlements continue to grow today ... And this persists even as it becomes clear that the logic of settlements and the reality of demographics could threaten the future of Israel as a Jewish democracy."
Under US law, the United States must penalise Israel for settlements in Palestinian areas by withholding the exact amount spent on such activity from the $9 billion in promised loan guarantees.
Washington has also said it may deduct from those guarantees the amount Israel spends on portions of its apartheid wall that intrudes into Palestinian territory.