The Palestinians have made the settlement issue central to efforts to restart stalled peace talks, demanding that all construction is halted before they sit down with the Israelis.
Barack Obama, the US president, warned on Wednesday that any settlement activity not only made harmed attempts to get negotiations going again, it could also threaten Israel's security.
"I think that additional settlement building does not contribute to Israel's security, I think it makes it harder for them to make peace with their neighbours," he told Fox News.
"I think it embitters the Palestinians in a way that could end up being very dangerous."
The Palestinians, Europe and the UN have also heavily criticised the expansion of the settlement, outlined in blueprints published by a government commission on Tuesday.
Nabil Abu Rudeineh, the spokesperson for Mahmoud Abbas, the Palestinian president, told Al Jazeera: "Israel wants, through its actions, to secure the invalidity of establishing an independent Palestinian state.
"The international community's continued acceptance of these Israeli measures threatens stability in the region and the foundations of peace we seek."
Gilo sits on land captured by Israel in the 1967 Middle East war and annexed to its Jerusalem municipality.
Under international law, all Israeli settlements built on occupied land are illegal.
Al Jazeera's Jacky Rowland in Jerusalem said: "What we are seeing is Israel's strategy of trying to differentiate between East Jerusalem and the rest of the occupied West Bank.
"We have seen the government repeatedly claim that Jerusalem is its so-called united capital and the government said just today that whereas it planned to exercise what it called maximum restraint in the West Bank, it claimed that Jerusalem was a different case."
'Strengthening its grip'
The plan for the housing units was cleared at a local level in April and passed by a committee of the interior ministry on Tuesday, Rowland said.
"It [Gilo] is one of these Jewish settlements across the green line in occupied Palestinian land which is attached to Jerusalem basically as a way of Israel trying to strengthen its grip on the capital, and literally create 900 more facts on the ground," she said.
Israel rejects the international description of Gilo as a settlement and says it is a neighbourhood of Jerusalem.
The West Bank-based Palestinian Authority has expressed frustration at Israel's refusal to concede in order to get peace talks back on track and on Sunday said they would take steps to get the UN to back their right to an independent state.