"Jerusalem's planning and urbanisation committee on Sunday authorised the enlargement of 2,000 homes in the neighbourhood of Ramat Shlomo," it said in a statement.
"An additional room will be built in each of these 2,000 homes in response to the needs of the numerous families suffering from housing problems in this area," it added.
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The Ramat Shlomo neighbourhood lies in an area of Arab east Jerusalem, which Israel captured during the 1967 Six Day War and later annexed in a move not recognised by the international community.
Israel considers Jerusalem to be its undivided capital, but the Palestinians, with the support of much of the international community, want to make east Jerusalem the capital of their future state.
Israel's construction or expansion of homes in the area has drawn criticism from European capitals and Washington in the past, and settlement building in Ramat Shlomo led to a crisis in relations with the United States last year.
In March 2010, Israel announced approval for the construction of 1,600 homes in the settlement neighbourhood just as US Vice President Joe Biden visited the Jewish state for meetings with Israeli officials.
The announcement angered Biden, and prompted Israeli Prime Minister Benjamin Netanyahu to offer an apology for the "unfortunate timing."
That announcement came as US officials laid the groundwork for the resumption of direct talks between Israel and the Palestinians, the first in nearly two years.
The talks were launched later that year in Washington, but ground to a halt shortly after they started when Israel declined to renew a moratorium that froze settlement construction in the West Bank, though not in Jerusalem.
The Palestinians have refused to hold talks while Israel builds on land they want for their future state, and negotiations have remained on hold since late September 2010 because of the issue.
