A Jerusalem committee has approved a plan for 2,200 housing units to be built in the Arab neighbourhood of Jabel Mukaber, in occupied east Jerusalem.
According to Haaretz, the plan had been stalled for several years by right-wing activists and Haredi ultra-Orthodox city councilmen opposed to the plan. The deal, to build houses in 130 hectares (321 acres) with infrastructure including parks, roads, schools and cultural institutions, will "strengthen Israeli sovereignty over east Jerusalem", according to Jerusalem Mayor Nir Barkat.
He argued that the move will curb the "illegal construction of thousands of housing units and the takeover of large areas in a way that undermines the environment and Israeli sovereignty over united Jerusalem".
Right-wing activist Aryeh King threatened to resign in the aftermath of the deal.
"This is a crazy plan -- building for Arabs. The plan was prepared by the leftist NGO in order to change the demographic balance in the city, without discussing it first with us. Jerusalem Mayor Nir Barkat is a danger to the city," he said.
Israeli NGO Bamakom - Planners for Human Rights participated in the expansion plan with the municipality.
The move came after US secretary of state John Kerry called Israeli PM Benjamin Netanyahu to protest against Israel's plan to expropriate 400 hectares (988 acres) of land near Bethlehem in the occupied West Bank.
The announcement comes four days after a month-long conflict in the Gaza Strip ended with a long-term ceasefire between Hamas and Israel.
Israel's settlements in the West Bank are a key source of tension between the state and the Palestinian Authority and are considered illegal under international law.