The building work will create 24 new homes on the site
Israel has approved the construction of four new apartment buildings in East Jerusalem, despite international calls for a halt in settlement building.
The project will create 24 new homes in the area the Palestinians want as the capital of their future state.
Palestinian leaders objected to the construction and repeated their call for Israel to cease all settlement building activity in the West Bank.
Israel annexed East Jerusalem in 1967 and denies the settlements are illegal.
Chief Palestinian negotiator Saeb Erakat said the Israeli government was "talking about peace and negotiations in a way that is totally opposed to the reality on the ground where settlement activity is continuing".
"We condemn this decision in the strongest language and we condemn the Israeli government's continuing construction of settlements in east Jerusalem and the West Bank," he told the AFP news agency.
About 268,000 Palestinians live in East Jerusalem, alongside 200,000 Israeli Jews.