The prime minister is expected to back work on hundreds of new homes next week in addition to 2,500 units already being built, a senior aide said.
He will then consider a temporary halt to settlement building, as requested by the US in a bid to restart peace talks.
The news angered the Palestinians who said it was “absolutely unacceptable”.
The US has been pushing Israel to accept the Palestinians’ demand for a complete halt to all settlement building in the Israeli-occupied West Bank, including East Jerusalem, before they will resume peace negotiations.
But Israel wants to continue building to allow for what it calls the “natural growth” of communities there, and refuses to halt construction in East Jerusalem.