Israel is to build 3,000 new settler homes in East Jerusalem and the West Bank after the Palestinians won recognition as a non-member state at the United Nations.
An Israeli official told news agency AFP that Prime Minister Benjamin Netanyahu had decided to build the units in response to the Palestinians success at the UN.
It is reported that some of the homes will be built in E1 which is a highly-contentious area of the West Bank.
Israel had promised the US President Barack Obama it would freeze the E1 project as part of its commitments under the international roadmap for peace.
The Palestinians bitterly oppose the project as it effectively cuts the occupied West Bank in two making the creation of a viable Palestinian state highly problematic.
UN vote for elevated status
Last night the UN General Assembly voted to give the Palestinian upgraded standing at the organisation - voting 138 Yes, 9 No with 41 abstentions.
Observers have the right to speak at the General Assembly meetings as well as to participate in procedural votes but not to vote on resolutions and other substantive matters.
Earlier yesterday the United Nations Secretary-General Ban Ki-Moon stressed the urgency of stepping up efforts to get the Middle East peace process back on track.
"Achieving the 2-State solution, to which both Israel and the Palestinians have committed, is long overdue. "I call on Israeli and Palestinian leaders to show vision and determination. I also urge the international community to help them forge a credible political path that will meet the legitimate aspirations of both sides" he said.