Israel has authorised the building of 112 new apartments in a Jewish settlement in the West Bank.
This comes as US Vice-President Joe Biden flies to the region, becoming the highest ranking US official to visit since Barack Obama took office.
On Sunday, Palestinian Authority leaders in the West Bank agreed to indirect talks with Israel.
Israel had promised a 10-month pause in settlement building in the West Bank, not including East Jerusalem.
The announcement will place strain on the already fragile agreement to talk, Palestinian negotiators say.
US Envoy George Mitchell is in the region to mediate in what's referred to as "proximity talks".
But other Palestinian groups based in Syria, including the Islamist Hamas movement which runs the Gaza Strip, rejected the talks.
They said the talks were bowing to pressure from Israel and the US.
'Grudging'
The planned apartments are in the settlement of Beitar Illit, which has a mostly Orthodox Jewish population.
Israeli ministers said the buildings would be allowed to go ahead because of what they termed called "safety issues".
A statement from the Defence Ministry said the building was needed to plug a potentially dangerous 40-yard gap between two existing buildings.
"Beitar Illit is an exceptional permit that came about following safety problems in the infrastructure," the statement said.
The building permits were issued under the previous government of Ehud Olmert and before the pause was announced the settlement said.
The Palestinian leadership in the West Bank had demanded a complete stop to settlement building as a precondition to re-engaging in talks which broke down more than a year ago.
They agreed "grudgingly" reports said, and came after many months of shuttle diplomacy from Mr Mitchell.
The talks should be limited to four months, Palestinian officials said.
Under heavy US pressure, the Israeli government agreed in November to a temporary and partial pause in building.
It said that work which had already started on 3,000 homes should be allowed to continue, and further exceptions to the pause were possible.
Israel has refused to stop building in East Jerusalem, which the Palestinians say they want as the location of a future capital of a Palestinian state.
In February the Israeli government revealed that work had been continuing in many settlements despite the promise of a pause.
'Exception'
Palestinian negotiator Saeb Erekat said the move put the talks at risk.
"If the Israeli government wants to sabotage Mitchell's efforts by taking such steps, let's talk to Mitchell about may be not doing this if the price is so high," he was quoted by the Associated Press as saying.
Israeli Environment Minister Gilad Erdan said the settlement was "an exception" to the building pause.
"At the end of last year the government decided to freeze construction, but this decision provided for exceptions in cases of safety problems for infrastructure projects started before the freeze," he told Army Radio.
Peace Now, an Israeli group, said the announcement raised questions about Israel's commitment to the peace process.
"The Israeli government is welcoming the US Vice-President by demonstrating, to our regret, that it has no genuine intention to advance the peace process," the group's settlement expert Hagit Ofran told AP.
All settlements in the the West Bank, including East Jerusalem, are considered illegal under international law, although Israel disputes this.
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