The three Meretz party members of Barkat's city council coalition threatened to pull out if the mayor takes a concrete step toward implementing the settlement plan, Haaretz reported Tuesday.
"Barkat is adding fuel to the flames," said councilman Meir Margalit. "The Palestinians cannot live with a plan like this."
The 200-home settlement would be built on a plot of land purchased by U.S. millionaire Irving Moskowitz, a long-time patron of Jewish settlers in East Jerusalem.
It would be constructed in the Kidmat Zion neighborhood that lies between the East Jerusalem Palestinian towns of Abu Dis and Jabal Mukkaber near the separation border.
The location is considered one of the most sensitive areas in East Jerusalem because it is near the site selected as the future home of the Palestinian parliament.