Palestinians consider East Jerusalem part of the occupied West Bank, which they want for a state and where Israel is obliged to freeze Jewish settlement activity under a 2003 peace "road map" championed by the United States.
Boim said the controversial project, known to Israelis as Har Homa and to Palestinians as Abu Ghneim, "is within Jerusalem's municipal borders, where Israeli law applies.
"There is thus nothing to prevent the construction there, just as there is nothing to prevent construction anywhere else in Israel"
Zeev Boim, Israel's construction and housing minister
"There is thus nothing to prevent the construction there, just as there is nothing to prevent construction anywhere else in Israel".
Israel announced earlier this week that it was seeking bids from construction firms to build over 300 homes and other units at the new site - located south of East Jerusalem.
A government spokesman said the tender was part of a seven-year-old plan.
Israel's annexation of East Jerusalem and integrating the surrounding West Bank areas within much expanded Jerusalem city limits is not recognised internationally.
Israel has settled Jews on much of that land, effectively isolating East Jerusalem.
Ban Ki-moon, the UN secretary-general, said the Israeli building project was "not helpful", and Nabil Abu Rdainah, a Palestinian presidential aide, said the Americans "must pressure the Israeli government to stop settlement activities".
Negotiators from the two sides will meet in Jerusalem on Wednesday for the first round of talks since Ehud Olmert, Israel's prime minister and Mahmoud Abbas, the Palestinian president, met in Annapolis.