"Today, the work on the ground has begun, as I promised, to establish a new settlement for the Amona settlers," Netanyahu tweeted over a picture of a small bulldozer and a digger working on a rocky hill overlooking a vineyard.
The Amichai settlement, in the northern West Bank, is earmarked for some 40 families evicted from the wildcat outpost of Amona in February under a high court order which ruled their homes had been built illegally on private Palestinian land.
"After dozens of years, I have the privilege to be the prime minister building a new settlement in Judaea and Samaria," Netanyahu tweeted, using the Hebrew biblical term for the West Bank.
His announcement comes a day after Trump's special representative Jason Greenblatt arrived for talks with Israeli and Palestinian officials on relaunching peace talks that collapsed in 2014.
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Greenblatt is to be joined by Trump's son-in-law and adviser Jared Kushner on Wednesday.
Jewish settlements in the West Bank, including Israeli- annexed east Jerusalem, are illegal under international law and are considered one of the main obstacles to peace.
Trump has asked Netanyahu to hold back on settlement building as he seeks to build momentum for a new peace push.
But the Israeli leader faces political pressure from the settler movement, which wields strong influence in his right- wing governing coalition.
Ahead of the arrival of the two envoys, the White House urged both Israel and the Palestinians to "create an environment conducive to peacemaking".
The ground-clearing work was in preparation for the installation of dozens of mobile homes for the families evicted from Amona, a spokesman for the main settler organisation, the Yesha Council, said.
The settlers would live in the temporary accommodation while work continues on building more permanent homes, the spokesman added.