Palestinians have warned repeatedly that settlement building destroys the fragile US-brokered peace talks process that resumed in July after a three-year hiatus.
"The Israeli government will announce tenders for new construction in the West Bank and in east Jerusalem which will coincide with the release of a third group of Palestinian prisoners," the official told AFP on condition of anonymity.
The comments come days after Prime Minister Benjamin Netanyahu vowed to push ahead with settlement construction despite calls for restraint by US Secretary of State John Kerry and the European Union.
Kerry, who has been fighting to keep the peace talks going, urged Netanyahu earlier this month "to exercise maximum restraint in announcing new construction", the Haaretz daily has reported.
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Israel is due to release another 26 Palestinian prisoners on Sunday, in line with commitments to the US-backed peace process which also called on both sides to negotiate for nine months.
Israel agreed to free 104 Palestinian prisoners and has already released 52 in two separate batches.
The previous releases in August and October were accompanied by Israeli announcements of fresh construction on land the Palestinians want for a future state, provoking international condemnation and Palestinian officials to say Israeli settlement plans are destroying the peace process.
Israeli daily Maariv cited an unidentified top official as saying Netanyahu had initially agreed to US and EU appeals to delay an announcement of new construction, but changed his mind under pressure from his coalition partners in order not to project a "signal of weakness".
Defence Minister Moshe Yaalon said today Israel would not accept the "trickle of terror from the Gaza Strip".
"If there is no quiet in Israel, there won't be quiet in Gaza," he said.
A rocket fired from Gaza early in the day hit southern Israel, causing no injuries or damage.