Israeli Housing Minister Ariel Attias told Army Radio it could be a year or more before new construction began at Gilo.
U.N. Secretary-General Ban Ki-moon deplored the Israeli plan for Gilo, spokesman Farhan Haq said. Ban "believes that such actions undermine efforts for peace and cast doubt on the viability of the two-state solution," he said.
Some 500,000 Jews live in the West Bank and East Jerusalem among 2.7 million Palestinians.
(Additional reporting by Sangwon Yoon in Jerusalem and Jeff Mason in Washington, Editing by Alastair Macdonald/David Stamp)