Although US policy and the internationally-backed "road map" for Middle East peace call for a freeze in all settlement activity, the Bush administration now supports construction of new apartments, the Times said on Saturday.
The move reflects a decision this week to lend support to Israeli Prime Minister Ariel Sharon during a time of political turmoil, an administration official said, describing "a covert policy decision toward accepting natural growth" despite public statements to the contrary.
All such settlements on occupied land are illegal under international law but Israel disputes this.
On Thursday, White House national security adviser Condoleezza Rice said Israeli plans to build 1000 new homes in Jewish settlements in the West Bank were inconsistent with the road map, the Middle East peace plan jointly drafted by the US, the European Union, the United Nations and Russia.
"We believe that the Israelis should live up to their obligations under the roadmap ... And we've been very clear that settlement expansion is not consistent with our understanding under the road map," Rice said in a speech at the US Institute of Peace in Washington.
"Settlement expansion is not consistent with our understanding under the road map"
US national security adviser
But despite such statements, US acceptance of settlement growth has been tacit for months, an unnamed Israeli official said.
"An Israeli official asserted that for some time, it was understood in Israel and in Washington that settlements could in effect expand vertically, within already dense construction areas, but not in an outer direction, and that the Americans understood this," the paper said.