The US offer, which would give Israel political and security benefits in exchange for a one-off moratorium of 90 days, was laid out before the cabinet by Prime Minister Benjamin Netanyahu.
The new freeze would not cover construction in annexed east Jerusalem but would include all building begun since September 26 when the previous 10-month moratorium expired, a source close to the negotiations said.
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
But the Palestinians insisted they would only accept a "comprehensive" ban on all Jewish settlement construction.
If Israel accepts the US deal, Washington would pledge not to request another moratorium, would give Israel another three-billion-worth of F-35 stealth fighter jets and would pledge to block international efforts to force a political settlement on Israel.
Netanyahu said US Secretary of State Hillary Clinton had outlined the proposals when they met in New York on Thursday, but stressed that the package had not yet been finalised.
"It is not yet final, it is still being formulated by our team and that of the Americans," he told reporters in Jerusalem.
"If and when the proposal is completed, I shall bring it to the appropriate government forum, in this case, the security cabinet."
Meanwhile, settlement watchdog Peace Now published a report Sunday showing that in the seven weeks since the end of the moratorium, Jewish settlers had begun building work on 1,649 new homes -- more than making up for the 10-month ban.
Figures showed that since the freeze ended, new homes had been started in 63 settlements and, in more than two-thirds of cases, settlers had begun laying the foundations.
"It turns out that the settlement freeze was no more than a 10-month delay in the construction and the settlers managed to fill in the gap very fast," Peace Now said.
"The government of Israel must renew the freeze in a way that will stop all settlement activity, including the projects that started in the last few weeks, until there is a final agreement between the Palestinians and Israel regarding the borders and the future of the settlements."
The US offer is the latest in a series of steps aimed at persuading Israel to impose a new freeze in a bid to salvage moribund peace talks with the Palestinians.
The talks, which began two months ago, shuddered to a halt over renewed settlement building following the end of the ban, with Palestinian president Mahmud Abbas refusing to return to the table unless Israel committed itself to a new one.
Abbas spokesman Nabil Abu Rudeina said the Palestinians had not formally been informed about Washington's proposals, while stressing that any new ban must be "comprehensive" and include the West Bank and east Jerusalem in line with Arab League demands.
"The Palestinians are committed to the decision of the Arab monitoring committee for a comprehensive freeze for the resumption of negotiations," he told AFP.
A senior Palestinian official told AFP that David Hale, assistant to US Middle East envoy George Mitchell, was due to arrive in the West Bank city of Ramallah late on Sunday and would brief Abbas on the proposals on Monday.
The Arab League's position was laid out last month at a summit in Libya, giving Washington a month to rescue the talks which ran aground in late September after the earlier moratorium ran out.
They have since extended that deadline until the end of November.
Until now, the Palestinians have refused to continue talking without a fresh ban on settlement construction, a move which Israel has so far refused to consider.
As Israel examined the US offer, the Yesha Council of settlers warned that renewing the ban was "a trap" that would lead Israel into "the political slaughterhouse."
"During the period of the additional freeze, Israel will be led into a political slaughterhouse in which it will be asked to agree to borders close to the 1967 borders and to strip all of its assets in order to continue negotiating."
The Palestinians see the settlements as a major threat to the establishment of a viable state, and they view the freezing of settlement activity as a crucial test of Israel's intentions.
