The report by Peace Now, which opposes settlement construction, showed Israel began construction on more than 1,850 units in 2011 -- up from 1,550 in 2010, when Israel had observed a partial moratorium, the Los Angeles Times reported.
The report showed the number of new apartment units approved in East Jerusalem increased nearly seven-fold in 2011, from 495 to 3,690.
Palestinian leaders criticized the number of settlements and blame Israel's settlement police for stalled peace talks.
"It should send alarm bells to the world that Israel is killing any chance for the two-state solution," said Ghassan Khatib, a Palestinian Authority government spokesman.
Israeli Prime Minister Binyamin Netanyahu's government "is promoting several plans precisely in disputed areas which could prevent the possibility of establishing a Palestinian state alongside Israel," the report said.
Palestinians say they won't participate in formal peace talks until Israel stops all settlement construction.
Israeli officials defended the settlement policy. They noted a self-imposed 10-month moratorium on new construction in 2010 did not return Palestinians to negotiations. Israel also faces a housing shortage.
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