The municipal approval is the latest case of what Palestinians call efforts to push them out of their own neighbourhood.
Israeli authorities have approved the construction of a three-storey residential building for Jewish settlers in a Palestinian neighbourhood of occupied East Jerusalem.
The building, approved on Wednesday, is located in Silwan neighbourhood that has become a flashpoint in the struggle between ideologically driven Israelis and longtime Palestinian residents.
Hundreds of Jews, armed or protected by Israeli security forces, already live among 50,000 Palestinians in Silwan.
Jerusalem city hall said a committee had approved the construction of the residential building.
"Political considerations do not factor into the decisions of the local planning committee," it said in a statement.
"The city will continue to build in all neighbourhoods, according to the master plan, for the benefit of all its residents."
Palestinians have decried the influx of settlers into Silwan, accusing them of seeking to push them out of their own neighbourhood.
Wasel Abu Yousef, a senior member of the Palestine Liberation Organization, condemned the Jerusalem municipality's decision.
"This government is moving forward to implement its programme to bring Israeli settlers and settle them in the place of the Palestinian residents to change the demographic situation in the Holy City," Abu Yousef told the Reuters news agency.
The Palestinians consider East Jerusalem the capital of their future independent state, and much of the international community has criticised Israel over its settlement constructions, both there and in the occupied West Bank.
Israel occupied East Jerusalem in 1967 and later annexed it in a move never recognised by the international community. It sees all of Jerusalem as its unified capital.
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