Israel has launched a tender for the construction of 550 new homes in Jewish settlements in the West Bank.
The Palestinians have launched an appeal over the fence
Almost all the houses will be built in the ultra-Orthodox settlement of Beitar Elit, near Jerusalem.
The announcement comes a day after the government agreed plans to build protective fences around several West Bank settlements.
About 400,000 Israelis live in the West Bank and East Jerusalem, in settlements widely regarded as illegal under international law.
The Israeli housing ministry says this decision is part of its policy to create more housing across the whole of Israel, not just the occupied territories.
It was, according to a spokesman, intended "to develop the communities in accordance with their needs and natural growth".
Despite international laws banning settlement in occupied areas, Jewish settlement building has expanded continually since Israel's occupation of the West Bank and Gaza in 1967, increasing rapidly in the late 1970s when the current Prime Minister, Ariel Sharon, was housing minister.
The pressure group Peace Now said the latest decision showed the housing ministry was acting as "a master planner for the settlers".
Housing Minister Effi Eitam is a member of the far-right National Religious Party, which has close links with the settlers.
The Palestinian Authority has appealed to the nations that backed the now-stalled roadmap peace plan to stop any extension of the fence through the West Bank, because it will cut off Palestinian villages and towns from other Palestinian areas.
The main backer of that peace plan, the United States, had expressed concern, so for now Israel is not going to join up the new section with the old.
But the BBC's Jannat Jalil - reporting from Jerusalem - says many Palestinians are worried that Israel will delay the move until US President George W Bush is distracted by his re-election campaign.