The approval comes days after a key international report warned that Israel's settlement expansion and confiscation of Palestinian land were eroding the possibility of a two-state peace settlement.
The report from the diplomatic Quartet -- the United States, European Union, United Nations and Russia -- also called on Palestinians to halt attacks and incitement to violence.
Under the new approval granted by Prime Minister Benjamin Netanyahu and Defence Minister Avigdor Lieberman, planning for 560 new Jewish homes in the large Maale Adumim settlement east of Jerusalem will be allowed to move forward.
Netanyahu also gave approval for the planning of 240 new homes in settlement neighbourhoods of annexed east Jerusalem, as well as for 600 units for Palestinians in the city's Beit Safafa district, media reported.
The offices of Netanyahu and Lieberman refused to comment on the reported approvals, which follow calls inside Israel for a harsh response to the latest spate of Palestinian attacks.
On Thursday, 13-year-old Israeli-American Hallel Yaffa Ariel was fatally stabbed in Kiryat Arba settlement on the outskirts of the flashpoint West Bank city of Hebron.
A day later, Sarah Tarayra, 27, was shot dead after drawing a knife on Israeli forces in Hebron. She was a relative of the Kiryat Arba attacker.
Also last Friday, 48-year-old Israeli Michael Mark was killed when his car was fired on by suspected Palestinian gunmen south of Hebron.
Israel the same day announced a lockdown in Hebron as it searched for the gunmen and it reduced the monthly tax payments to the Palestinian Authority as a retaliatory measure.
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