Israeli Minister without portfolio Matan Vilnai on Wednesday sought to downplay a row with the US over the issue and said the plan to build 3500 housing units at Maale Adumim outside Jerusalem had been around for years.
Its approval by the government last month should not be regarded as news, he added.
"This project has been around for a dozen years and is not being implemented at the moment," Vilnai told public radio.
"We need to build a security barrier in this area at the moment, not houses."
US anti-settlements stance
The plans have cast a cloud over talks next week between US President George Bush and Israeli Prime Minister Ariel Sharon.
Bush warned Israel on Tuesday that there can be "no expansion" of settlements in Palestinian territories under the US-backed roadmap to Middle East peace.
"Our position is very clear, that the roadmap is important, and the roadmap calls for no expansion of the settlements," Bush told reporters.
Israeli radio cited unnamed Israeli officials as saying that the row over Maale Adumim settlement would "not cloud" the meeting.
"During their meeting, President Bush and Prime Minister Sharon should be able to find a formula on this subject which is agreeable to both parties," Vilnai said.