"The municipal committee has today given its final approval for the construction of 69 homes in Har Homa in east Jerusalem," councillor Meir Margalit told AFP.
The approval was granted by the municipal planning committee just hours before Kerry touched down in Amman on his fifth visit to the region since February as he steps up efforts to draw Israel and the Palestinians back into direct negotiations.
"It proves just how much the government of Bibi (Benjamin) Netanyahu wants peace," he retorted, using the nickname of the Israeli prime minister.
Har Homa is a settlement neighbourhood located in the southern sector of Arab east Jerusalem which was occupied by Israel during the 1967 Six-Day War then annexed, in a move not recognised by the international community.
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The contentious decision was likely to set tempers flaring a day before Kerry travels to Jerusalem for talks with Netanyahu.
He was expected to meet with Abbas in Amman on Friday.
Ahead of his departure, Kerry said he was confident that both Israel and the Palestinians sides were keen to push ahead with peace talks.
"I am quite confident in their serious commitment of purpose," Kerry told reporters in Kuwait City. "I believe they believe the peace process is bigger than any one day or one moment."
Settlement construction was the issue which brought about a collapse of direct peace talks in September 2010 just weeks after they were started when Israel failed to renew a freeze on all new West Bank construction.
Building work at Har Homa, which is close to the West Bank city of Bethlehem, began in 1997 during Netanyahu's first term as premier, in a move which led to the breakdown of peace talks.