Tel Aviv announced on Monday that it has officially approved the construction of 366 new flats for Israeli settlers in illegal West Bank colonies.
And Israeli Defence Minister Ehud Barak said that he intends to approve about 84 more soon.
The first new construction that Prime Minister Benjamin Netanyahu's hawkish government has approved since taking office in March threatens to derail attempts to get Middle East peace efforts back on track.
US President Barack Obama has called on Arab states to normalise relations with Israel in return for a settlement freeze.
But Mr Netanyahu's administration has only agreed to consider an "easing" of settlement construction.
And the Israeli media have suggested that any moratorium would exclude 2,500 homes that are already being built in the West Bank - as well as any building in annexed east Jerusalem.
Amid speculation that some Arab states may answer Mr Obama's call, Palestinian National Authority leader Mahmoud Abbas has urged Arab states to unite against further settlement expansion.
During a meeting with Saudi King Abdullah on Sunday night he called for "a firm unified Arab stance in face of Israel."
Mr Abbas's spokesman Nabil Rudeina said that the PNA president described the latest settlement growth as "not just a challenge to the Arabs, but it also destroys the peace efforts of Obama."
The PNA leader reportedly warned that that he would not return to the negotiating table before Tel Aviv called a halt to settlement building.
Mr Abbas has previously threatened that if Israel went ahead with construction, there would be no point in holding the forthcoming three-way meeting between himself, Mr Netanyahu and Mr Obama scheduled for the UN general assembly later this month.
Hamas leader Khaled Meshaal recently came out against any precipitate Arab move toward normalisation, stressing that recognising Israel in return for Mr Netanyahu's vague talk of easing settlement construction was a "dangerous equation."
And Arab League secretary-general Amr Moussa has warned that the organisation would have a "tough reaction" against any member state that was willing to take Israel up on the offer.
Last week the White House released a statement querying the legitimacy of the continuing Israeli expansion of settlements, urging its cessation.