Al Jazeera's Jacky Rowland, reporting from Jerusalem, said that the suspension would only apply to "new residential permits and new residential starts".
"We are only talking about housing here. This freeze does not apply to public buildings such as schools or police stations or whatever, and it also means any existing building permits that have been granted they will go ahead," she said.
"Any construction which has already begun, any construction sites where the cement mixers are already whirring and the cranes are at work they will continue."
A spokesman for Mahmoud Abbas, the Palestinian president, earlier dismissed the Israeli plan after details of it were outlined in a statement from Netanyahu's office.
"Any return to negotiations must be on the basis of a complete settlement freeze, and in Jerusalem foremost," Nabil Abu Rdainah said.
Referring to Jerusalem in Wednesday's news conference, Netanyahu said: "My position it is well known, I do not impose any restriction on building in Jerusalem."
The West Bank-based Palestinian Authority, led by Abbas, has refused to return to peace talks with the Israelis until Netanyahu orders a complete freeze to all settlement building work in the West Bank and East Jerusalem.
Before Netanyahu's news conference, Ehud Barak, the Israeli defence minister, told the security cabinet that the proposal was an attempt to "keep open a window to the resumption of the negotiation process" with the Palestinians.
"Israel is strong and determined, but time is not necessarily on our side, and it is important to move towards two states for two people, through agreement. All other options are much worse," he said.
Washington has been pressing Israel to freeze settlement construction in order to allow the talks, which have been on hold since Israel launched its 22-day offensive in the Gaza Strip last year, to resume.
Mixed US reaction
George Mitchell, the US special envoy to the Middle East, called the 10-month suspension "significant".
"It falls short of a full settlement freeze, but it is more than any Israeli government has done before," he said.
"It falls short of a full settlement freeze, but it is more than any Israeli government has done before"
George Mitchell, US special Middle East envoy
"As President Obama has said many times, we believe that a two-state solution to the conflict is the best way to realise the shared goal of Israelis and Palestinians to live in peace and security.
"That's why we have urged the Palestinians to expand and improve their security efforts. And it's why we've urged Israel to stop settlement activity."
The Palestinians and the US had previously dismissed an Israeli proposal that would have seen a halt to new settlement construction, but allow what Israel calls "natural growth" to provide for settlers as their population rose.
Al Jazeera's Nour Odeh, reporting from the West Bank town of Ramallah, said that Washington's apparent softening on the issue in recent weeks had "deeply disappointed the Palestinian public and the Palestinian president".
"There was a lot of hope attached to this Obama presidency," she said.
"A lot of people really believed his statements and his promises that the Obama administration would be balanced and that it would really seek a firm start to a political process that would lead to Palestinian statehood within two years.
"Now most Palestinians, if not all, feel let down."
About 500,000 Jews live in the West Bank and annexed areas around Jerusalem alongside 2.7 million Palestinians.
Palestinians say the settlements deny them the possibility of a viable state by cutting off Palestinian areas from each other.