Jerusalem's municipal planning committee has granted approval for 40 new housing units in the Pisgat Zeev settlement in occupied east Jerusalem.
Four new buildings, each of them to house ten apartments, were agreed on Monday.
Kobi Kahlon, the chairman of the committee, described the new construction as a fundamental "right" for Israelis.
"We don't have the authority to deprive any man of the rights he deserves," Kahlon said.
Pisgat Zeev is a settlement of around 50,000 people located north of Jerusalem. The United Nations considers it illegal.
The committee approved a separate group of 32 housing units last month. Both approvals are part of a larger plan to build 210 new homes in the settlement.
The committee's decision was not unanimous, with several members warning that the new construction would jeopardise the prospect of negotiations with the Palestinian Authority.
"I've always said there was no problem with Pisgat Zeev, but the trouble is the timing," Yosef Alalo, a former deputy mayor of Jerusalem, said.
"We are now at the most critical moment for negotiations, and such an approval is harmful."
The Arab League last week granted a conditional approval to direct talks between Israel and the Palestinian Authority, provided that Mahmoud Abbas, the Palestinian president, gets several guarantees from the Israelis.
One of those conditions is reportedly a complete halt to new settlement construction in both the occupied West Bank and east Jerusalem.
Monday's announcement came just hours before PJ Crowley, the US state department spokesman, said now was the "right time" to resume direct talks.
"We strongly believe that this is the time where the parties need to move from proximity talks into direct negotiations," he said at a news conference.
Previous announcements from the planning committee have undermined other diplomatic efforts.
The committee approved 1,600 new homes in the Ramat Shlomo settlement in March, hours after Joe Biden, the US vice president, landed in Israel for a visit.
The announcement earned a rebuke from Biden, who said it would "undermine trust".