The move comes as Israel and the United States have been increasingly at odds over the settlement issue.
U.S. President Barack Obama has insisted Israel freeze all settlement activity as a necessary step toward advancing negotiations with Palestinians.
The Jewish settlements are spread throughout the Palestinian West Bank. Israel maintains the settlements are needed to accommodate growth from residents of existing settlements.
Chief Palestinian negotiator Saed Erakat said Israel's approval of new settlements is a direct challenge to the international efforts to restart negotiations.
"Israel's decision to approve the construction of over 450 new settlement units nullifies any effect that a settlement freeze, when and if announced, will have," he said. "It further undermines faith in the peace process, and the belief that Israel is a credible partner for peace."
Sabri Saidam, adviser to the Palestinian President Mahmoud Abbas, was also pessimistic.
"Israel's decision destroys the chances for peace and frustrates the efforts of the U.S. plan," Saidam said.
"Israel's rush to build more homes aims at controlling more land and creating new facts on the ground, and this does not support the possibility of building a state."
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