The prime minister is expected to back work on hundreds of new homes next week in addition to 2,500 units already being built, a senior aide said.

He will then consider a temporary halt to settlement building, as requested by the US in a bid to restart peace talks.

The news angered the Palestinians who said it was "absolutely unacceptable".

"The only thing suspended by this announcement will be the peace process," Palestinian negotiator Saeb Erakat told the AFP news agency.

'Moratorium'

The US has been pushing Israel to accept the Palestinians' demand for a complete halt to all settlement building in the Israeli-occupied West Bank, including East Jerusalem, before they will resume peace negotiations.

But Israel wants to continue building to allow for what it calls the "natural growth" of communities there, and refuses to halt construction in East Jerusalem.

The new housing would not be in East Jerusalem, the unnamed senior official in the prime minister's office said.

He said a temporary moratorium would be put in place if the "conditions are right", including if the Arab states were forthcoming in providing Israel with normalisation gestures.

There has been no US reaction to the likely building approvals.

Mr Netanyahu is under pressure from right-wingers in his governing coalition, including his own Likud party, to resist the call to freeze settlement building.

The issue is expected to be discussed when Mr Netanyahu's aides meet US President Barack Obama's special envoy to the Middle East, George Mitchell, next week.

The development comes a day after the Israeli media quoted unnamed US and Israeli officials saying that a US-Israel deal was close, which would entail a "temporary moratorium" on building, excluding units already under construction.

It would last for a "few months", depending on normalisation gestures from Arab states in exchange, such as tourism and trade relations and permission for Israeli planes to use air space, the newspaper Yediot Ahranot reported.

There have been hopes that the Israeli and Palestinian leaders could meet for talks - though possibly only informal ones - at the UN later this month.

But the BBC's Tim Franks in Jerusalem says the key question now is whether the other players in this diplomatic dance will accept Israel's definition of a settlement freeze.

The issue of Jewish settlements in the West Bank is one of the biggest stumbling blocks to President Obama's bid to resume the Middle East peace process.

Under the US-backed 2003 roadmap peace plan, Israel is obliged to end all settlement activity.

The plan also requires the Palestinian Authority to crack down on militants who seek to attack Israelis.

Close to 500,000 Jews live in more than 100 settlements built since Israel's 1967 occupation of the West Bank and Arab East Jerusalem. The settlements are illegal under international law, though Israel disputes this.