Maaleh Hazeitim, in east Jerusalem's Ras al-Amud section, was built by the U.S. millionaire Irwin Moskowitz on land seized by Israel in the 1967 Arab-Israeli War. The area already houses over 50 Jewish families.
Palestinian officials are concerned about widening Israeli construction in Ras al-Amud, which "makes it harder to create a Palestinian territorial corridor, a sort of 'safe passage' between the West Bank to the east, and the Temple Mount," the newspaper said.
Initial housing construction in the area sparked an international storm in September 1997, and Israel came under pressure by the U.S. to abandon the construction plan. Construction continued, however.
In December, Israel announced plans to build 300 new homes in East Jerusalem's Har Homa settlement, which already has some 2,000 Jewish homes.
The step drew criticism by the European Union, which joined the U.S. in condemning Israel's actions.
The so-called Road Map settlement plan proposed by international mediators in the Middle East peace process requires Israel to halt the construction of settlements in occupied Palestinian territories.
However, Tel Aviv insists the requirement does not extend to East Jerusalem - touted as the capital of any future Palestinian state.
Israeli and Palestinian negotiators launched the most serious peace talks between the sides in seven years on Monday, despite clear differences over what each aims to achieve.
The chief negotiators, Israeli Foreign Minister Tzipi Livni and former Palestinian prime minister, Ahmed Qurei, met in Jerusalem for initial talks intended to tackle the most problematic issues barring the road to peace - state borders, the fate of Jerusalem and the Palestinian refugees.
