However, the building permit was reportedly issued on Thursday, three days after the necessary fees were paid, meaning the final approval was given before Netanyahu began his visit to Washington.
Jerusalem city hall said media reports on the subject were "distorted" and meant to provoke during Netanyahu's Washington trip.
"Once the construction permits have been paid for they are automatically issued," the spokesman said on Israeli public radio.
When the project was approved in July, Washington demanded it be halted and summoned Michael Oren, Israel's ambassador to the US, to be reprimanded.
Underlining the tensions between the two allies, the meeting between Netanyahu and Obama was unusually low-key with the media prevented from taking pictures of the leaders meeting and no news conference held afterwards.
PJ Crowley, the US state department spokesman, told The Associated Press news agency that the US and Israel were engaged in "give and take" after Washington was angered by the settlement announcement made during a visit by Joe Biden, the US vice-president.
"We are not going to talk about the precise steps both sides have to take. We will continue to discuss those steps privately," he said.
Nir Chefetz, Netanyahu's spokesman, said that the "atmosphere was good" at the meeting.
He said the two leaders' advisers "continued discussions on the ideas raised at the meeting" and would hold further talks on Wednesday.
Netanyahu has shown little sign of giving in to US pressure over the settlement issue during his three-day visit.
"If the Americans support the unreasonable demands made by the Palestinians regarding a freeze on settlements in East Jerusalem and the West Bank, the peace process risks being blocked for a year," the Israeli media quoted him as saying earlier on Tuesday.
"Relations between Israel and the United States should not be hostage to differences between the two countries over the peace process with the Palestinians."
Those remarks came after a defiant speech to the American Israel Public Affairs Committee (Aipac) on Monday.
|Binyamin Netanyahu strikes a defiant tone in the face of US criticism over settlements
"The Jewish people were building Jerusalem 3,000 years ago and the Jewish people are building Jerusalem today," Netanyahu said.
"Jerusalem is not a settlement. It's our capital."
Alon Liel, a professor of international relations at Tel Aviv university and the former head of Israel's foreign ministry, said "a very crucial moment" in the Israeli-Palestinian conflict has been reached.
"The international community as a whole has reached a conclusion that if we don't freeze settlements now, and establish a Palestinian state now, it will never happen," he told Al Jazeera.
"[Netanyahu is] the prime minister that has to decide if Israel wants to go on settling.
"It's not only the relations with the United States that is on stake. The Quartet is united on this issue and the Quartet [of Middle East mediators] is the world ... It's a decision if Israel is going to be internationally isolated or not.".
Israel has repeatedly said that it sees Jerusalem as the capital of a Jewish state and will not allow it to be divided.
The Palestinians want the predominantly Arab east of the city, which was illegally annexed by Israel after the 1967 Middle East war, as the capital of any future independent state.
The Palestinians retreated from their agreement to begin indirect talks two weeks ago after Israel announced its plans to build 1,600 homes for Jews in an area of the occupied West Bank annexed to Jerusalem.
Before meeting Obama, Netanyahu received a warm bipartisan welcome at congress, with Nancy Pelosi, the House of Representatives speaker, saying: "We in congress stand by Israel. In congress we speak with one voice on the subject of Israel."
Netanyahu told the legislators that he feared peace talks with Palestinians may be delayed for another year unless Palestinians dropped their demand for a full freeze on Jewish settlement building.
"We must not be trapped by an illogical and unreasonable demand," Netanyahu said during a meeting with congressional leaders, according to his spokesman.
"It could put the peace negotiations on hold for another year," he said of the talks, which have been suspended since December 2008.
Tayseer Khaled, a member of the Palestine Liberation Organisation's executive committee, on Wednesday dismissed Netanyahu's comments as "threats."
"These threats is just an attempt to blackmail the international community to push it to surrender to Israel's continued violations of international law," he said.
"Netanyahu is committing political idiocy if he thinks he can break the will of the Palestinian people and international community by threatening to postpone negotiations for a year if Palestinians and the international community do not go back on their position calling for a freeze of all settlement activity, including in Jerusalem."
"The Palestinian side will not stand by without a response to these threats and this arrogance," Khaled said, warning the Palestinians will move in all international forums to apply pressure on Israel and hold its leaders to account.
At a meeting in Moscow on Friday, the Quartet of Middle East mediators comprising the UN, the US, the EU and Russia, called on Israel to freeze settlement activity in line with a 2003 peace "road map" which also obliged the Palestinians to take action to disarm fighters.