Israeli Housing Minister Zeev Boim said the construction at Givat Zeev would address "the demographic needs of Jerusalem," BBC reported Sunday.
The project was first given the green light in 1999, but construction came to a standstill after Palestinian laborers refused work on the project, the British network reported.
Resumption of the project was criticized by Palestinian leaders since expansion of the Israeli settlements is barred by the terms of the Israeli-Palestinian peace agreement.
"It seems to me the Israelis are determined to put a stick in the wheel of negotiations," Palestinian peace negotiator Saeb Erekat was quoted as saying.
A spokesman for the Israeli prime minister said the building at Givat Zeev is not a new decision, BBC said.
"This decision predates this government," said Olmert spokesman Mark Regev.
"We have approved it. It is consistent with our policy of building within the large settlement blocs, which will remain in Israel in any final-status agreement."