Existing building work continued the day after the announcement
Israel's government has approved 28 new schools for settlements in the West Bank, a day after it announced a 10-month halt to new residential building.
Defence Minister Ehud Barak said construction would completed before the beginning of the 2010-11 school year.
Settlers have been angered by the decision to limit building, although the Palestinians say it is not enough.
They refuse to restart peace talks without a total freeze and are angry the policy does not include Jerusalem.
Under the Israeli new policy, backed by the security cabinet on Wednesday, permits for new homes in the West Bank will not be approved for 10 months. But municipal buildings and hundreds of houses already under construction will still be allowed to go ahead.
The Palestinian Authority and some members of the international community, including Russia and the UK, want Israel to go further and include East Jerusalem. However, Israel does not consider Jerusalem occupied territory.
Nevertheless, right-wing Israeli leaders have been angered by what they see as capitulation by Prime Minister Benjamin Netanyahu, leader of the Likud party, and vowed to keep building.
The chairman of the settler group, the Yesha Council, Danny Dayan said on Wednesday that Mr Netanyahu had "betrayed the very principles for which he stood for all his life".
After approving the 28 educational institutions, Mr Barak said: "Alongside our duty to be open and attentive to the settler public we must not confuse ourselves, the state means what it says."
"Everybody who asks whether the political echelon intends to fulfil its decision, I say, the answer is positive. This is a real test for the Israeli democracy," he added.
The row over settlements has dogged US President Barack Obama's attempts to restart peace talks between Israel and the Palestinians since he took office.
Israel previously pledged to freeze all settlement activity under the 2003 Middle East peace plan known as the Roadmap, which also called on the Palestinian Authority to dismantle militant groups.
However, the administration of former US President George W Bush did not pressure it to curtail building in the settlement blocs which it was widely expected to keep in any eventual deal.
Mr Obama's administration began by pressing for a total freeze, but softened its language in the face of refusals from Mr Netanyahu and his right-leaning government.
Nearly 500,000 Jews live in more than 100 settlements built on occupied territory in the West Bank and East Jerusalem.
Settlement building in the West Bank, including East Jerusalem, is illegal under international law - although Israel disputes this.