Israel says it is examining plans for a new settlement in East Jerusalem, after facing heavy criticism for expanding an existing Jewish settlement there.
Neighbouring Palestinians are cut off from Atarot by Israel's barrier
Housing minister Zeev Boim said it was a preliminary look at possible housing development in the Atarot area.
He played down its significance, saying such checks were done year round on areas with building potential.
Palestinians say the Har Homa expansion announced this month threatened to derail re-launched peace negotiations.
"This is a preliminary examination of an initial construction plan. Such feasibility checks are done all year round on all areas with building potential in Jerusalem," Mr Boim said in a statement.
"The ministry has to offer a solution to the housing problem in Jerusalem."
Senior Palestinian negotiator Saeb Erekat said such plans would destroy the peace process and must be stopped.
"We consider these steps as threatening the beginning of the final negotiations between the two sides."
The Haaretz newspaper said the Atarot plan - south of Qalandia checkpoint which controls access to East Jerusalem from Ramallah - envisaged construction of 10,000 flats, making it the largest housing project for Jews.
The status of the area, occupied by Israeli forces along with the West Bank and Gaza Strip, the Golan and Sinai, during the 1967 war, is meant to be determined in bilateral talks.
But Israel considers East Jerusalem outside the debate, as it annexed the area soon after the war, although the move has not been recognised internationally.
The Palestinians want it as the capital of their future state, whose formation is the goal of the nascent peace talks.
Separately, the Israeli transport minister suggested that Israel might be willing to talk to the Palestinian militant group which controls Gaza, Hamas, through a third party.
Shaul Mofaz said such mediation would be aimed at halting Palestinian rocket fire from the Gaza Strip.
Israel says the move is in response to an offer made on Israeli TV by Hamas leader Ismail Haniya, although Hamas has since denied that it intends opening negotiations with the Israelis.
Hamas refuses to recognise Israel, and the Israelis have sealed off the Gaza Strip since it seized control there in June.