The latest move to build the Maskiot settlement comes two years after Israel froze the plan amid criticism from the international community.
But earlier this year, nine Israeli families settled in mobile homes at Maskiot, an area which Palestinians claim as part of their future state.
Saeb Erekat, chief Palestinian negotiator, said the Israeli plan would damage US-backed peace talks towards a two-state solution.
"This is destroying the process of a two-state solution ... I hope the Americans will make the Israelis revoke the decision. I think they can make the Israelis do this," he said.
Israel promised not to establish new settlements in the occupied West Bank when talks towards a two-state solution were re-established last year.
The two sides had aimed to reach a final peace deal by the end of 2008, but talks have foundered amid disputed over Israeli settlements.
Palestinians want the final deal to outline the formation of a Palestinian state in most of the West Bank, the Gaza Strip and east Jerusalem, territories captured by Israel in 1967.
Former Gaza settlers
Mark Regev, a spokesman for the Israeli government, said "Israel will stand by its commitments" on the new settlement plan, adding that Barak has not yet given final approval for its construction.
The Maskiot community is comprised of settlers which Israel evacuated from Gaza when it pulled out of that territory in 2005.
Israel said after the Gaza pullout that it would move settlers to the West Bank.
Earlier this year, Abbas briefly called off peace talks over Israeli construction work in the West Bank and east Jerusalem, which the Palestinian Authority wants as the capital of a future state.
Condoleezza Rice, the US secretary of state, has criticised the building of new settlements but Israel has not been penalised by Washington.