"Such feasibility checks are done all year round on all areas with building potential in Jerusalem," he said in a statement issued in response to a report by Israel's Haaretz
newspaper that said he had approved the construction plan.
The office of Ehud Olmert, Israel's prime minister, had also been quick to play down the expansion.
Haaretz reported on Thursday that Olmert had not been informed of a decision to authorise the Atarot development.
Recent announcements of expansion plans have sparked intense criticism as they come after last month's US-sponsored peace talks in Annapolis.
At the talks, both Israel and the Palestinians pledged to abide by the 2003 peace "road map", the first phase of which calls for Israel to halt settlement activity, while the Palestinians are called on to improve security.
Yariv Oppenheimer, from the Israeli human rights organisation Peace Now, told Al Jazeera that the settlements worked against the peace process.
"The state of Israel is occupying the West Bank, taking over the land and using it as if it was part of the State of Israel, while it is actually an occupied territory," she said.
She said her organisation opposed the settlement plans as "Israel will [eventually] have to withdraw from everything that she is building right now".
Saeb Erekat, the chief Palestinian negotiator, called on the world's most influential countries to pressure Israel to halt settlement expansion.
"Israel has to choose between continued settlements expansion and a commitment to peace," he told Al Jazeera.
Two weeks ago, Israel invited bids for more than 300 new housing units in another settlement at Jebel Abu Ghneim, or Har Homa as the settlement is known to Israelis, in east Jerusalem.
Olmert's aides have indicated the prime minister was also not informed prior to this announcement.