"The defense ministry has approved the construction of 50 housing units in the settlement of Adam," a statement said.
The decision to build the houses in Adam, north of Jerusalem, came despite repeated U.S. calls for Israel to halt all settlement activity in order to relaunch peace talks with the Palestinians.
The houses will be built for the relocation of some 200 settlers from nearby Migron, one of the largest so-called wildcat outposts -- small settlements that lack Israeli permits.
Israeli Prime Minister Benjamin Netanyahu has said his right-wing government will not build new settlements in the occupied territories but will not halt "natural growth" expansion of existing settlements either. The decision came shortly before Israeli Defense Minister Ehud Barak was to fly to New York to meet U.S. Middle East envoy George Mitchell on Tuesday, after a meeting between Mitchell and Netanyahu was canceled last week.