Israel has announced plans to build 228 new homes in Jewish settlements in the West Bank, just outside Jerusalem.
Efrat was also expanded in 2004
The move appears to breach commitments by Israel to freeze settlement activity in occupied territory, under the US-backed "road map" peace plan.
A spokesman said the building would take place in settlements - Beitar Illit and Efrat - that Israel intends to keep under any peace deal.
Palestinian officials condemned the move and urged the US to intervene.
The news emerged when the Israeli housing ministry placed a newspaper advertisement on Monday inviting tenders to build 150 housing units in Beitar Illit and another 78 in Efrat.
The two communities are part of the Gush Etzion settlement bloc - part of the territory Israeli Prime Minister Ariel Sharon has vowed to keep under any final accord with the Palestinians.
"These are the large settlement blocs, they will be strengthened," Mr Sharon's spokesman said on Monday.
The US has called on Israel to cease settlement building - though President George Bush has said Israel could expect to keep some settlements under any final peace deal.
Palestinians have demanded the whole West Bank as part of a Palestinian state, along with the Gaza Strip.
"The Israeli government has suspended negotiations, contacts and the peace process. The only thing that is still allowed to go on is the settlement activities. This undermines the peace process," chief Palestinian negotiator Saeb Erekat told Reuters.
Israel says the Palestinians have also failed to meet their obligations under the road map, to disarm militant groups.
The settlement plans came even as Mr Sharon's new party, Kadima, outlined its platform for March's election, indicating it would be willing to concede West Bank land as part of a deal with the Palestinians.
However, with elections imminent, boosting settlements could also be popular with Israeli voters, says the BBC's Dan Damon in Jerusalem.