The units are to be built in the Gilo neighborhood, which is on land seized during the 1967 Six Day War, and will include a boardwalk, public buildings, a school and an industrial zone, Ynetnews.com reported.
"Jerusalem in expanding to the south, creating affordable housing. We must clarify to the world that Jerusalem is not up for sale," said Yair Gabay, a member of the Jerusalem committee.
A statement from the Palestinian prime minister's office condemned the move, accusing Israeli Prime Minister Binyamin Netanyahu of sabotaging any effort to restart the peace process by making unilateral moves.
White House spokesman Jay Carney said the United States "is deeply disappointed by that announcement. We have maintained all along that each side in the dispute, the Palestinians and the Israelis should take steps that bring them closer to direct negotiations to resolve the issues that stand in the way of Palestinian statehood and a secure Jewish state of Israel."
"This is a time when all parties should be striving to return to talks," Hague was quoted as saying by The Jerusalem Post.
"We plan in Jerusalem. We build in Jerusalem. Period. The same way Israeli governments have been doing for 44 years, since the end of the 1967 war," Netanyahu said in an interview with the Post.