The security cabinet gave its unanimous backing to the new settlement late on Thursday as what is widely seen as the most right-wing government in Israeli history presses ahead with settlement expansion in defiance of international criticism.
Senior Palestinian official Hanan Ashrawi said the move showed "blatant disregard for Palestinian human rights".
"Israel is more committed to appeasing its illegal settler population than to abiding by the requirements for stability and a just peace," she said.
It will be the first entirely new settlement that an Israeli government has approved in more than 20 years.
In recent years, construction had focused instead on expanding existing settlements.
The international community regards all Israeli settlements in the occupied Palestinian territories as illegal and the biggest obstacle to Middle East peace, and the former US administration of Barack Obama had put up serious opposition to their expansion.
But right-wing Israeli leaders have been emboldened by the far less critical stance of US President Donal Trump.
Israeli Prime Minister Benjamin Netanyahu has been in discussions with the Trump administration on how to move ahead with further settlement construction.
Trump has pledged unstinting support for Israel but has also urged Netanyahu to "hold back on settlements for a little bit" while his administration looks for ways to restart Israeli-Palestinian talks.
Netanyahu had previously pledged to build a new settlement for the Amona residents evicted in February.
"I promised to create a new community and we are going to respect that commitment and create it today," he said ahead of Thursday's security cabinet meeting.
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