The issue of building settlements in occupied Palestinian areas halted the last direct peace talks in September 2010
Palestinians have reacted angrily to Israel's approval of nearly 1,200 new Jewish settlement homes, just days before peace talks are set to resume.
Palestinian negotiators said the approval cast doubt on Israel's sincerity in the peace process.
Israel's housing minister said no country in the world would take orders on where it could build its homes.
The issue of building settlements in occupied Palestinian areas halted the last direct talks in September 2010.
About 500,000 Jews live in more than 100 settlements built since Israel's 1967 occupation of the West Bank and East Jerusalem. The Palestinians want to establish their state in those areas, as well as the Gaza Strip.
The settlements are considered illegal under international law, although Israel disputes this.
'Dangerous policy'
On Sunday, Israeli Housing Minister Uri Ariel confirmed that 793 apartments would be built in East Jerusalem and 394 in several large West Bank settlements.
Palestinians said the plans brought into question Israel's commitment to the peace process.
Palestinian negotiator Mohammed Shtayeh said Israel aimed "to destroy the basis of the solution called for by the international community, which aims to establish a Palestinian state on the 1967 borders".
He accused Israel of trying to "determine the negotiations in whichever way suits it best".
Chief negotiator Saeb Erekat told Reuters: "If the Israeli government believes that every week they're going to cross a red line by settlement activity, if they go with this behaviour, what they're advertising is the unsustainability of the negotiations."
PLO executive committee member Hanan Ashrawi told the BBC: "We believe that Israel is deliberately sending a message to the US, to the rest of the world that regardless of any attempt at launching negotiations, 'we are going to press ahead with stealing more land, building more settlements and destroying the two-state-solution'.
"This is an extremely dangerous policy, and if left unchecked it certainly would lead to greater conflict and the destruction of all chances of peace."
Palestinian President Mahmoud Abbas had previously insisted he would not resume talks without an Israeli settlement freeze, but relented during mediation by US Secretary of State John Kerry.
The BBC's Kevin Connolly in Jerusalem says Israel's announcement of the settlement construction may be intended as a sop to right-wing supporters of the government.
They had been angered by the government's approval of the release of more than 100 Palestinian prisoners - a condition set by the Palestinians for the talks to go ahead. The first group is due to be freed on 13 August.
The negotiations are scheduled to start in Jerusalem on Wednesday.
The latest Israeli settlement approval invites tenders for homes in Har Homa and Gilo, on East Jerusalem's southern outskirts, and in Pisgat Zeev, on the city's northern edge.
Tenders will also be invited for Ariel, in the northern West Bank, in Maaleh Adumim, east of Jerusalem, and in Efrata and Beitar Ilit, around Bethlehem.
A housing ministry spokesman told the BBC that construction would begin in one to two years' time.
Mr Ariel said in a statement: "No country in the world takes orders from other countries [about] where it can build and where it can't.
"We will continue to market housing and build in the entire country... This is the right thing at the present time, for Zionism and for the economy.''
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