Israel has approved construction of 900 settler homes in annexed east Jerusalem, a watchdog said Thursday shortly after Prime Minister Benjamin Netanyahu formed a new rightwing religious coalition.

The new homes will be built in the east Jerusalem settlement neighbourhood of Ramat Shlomo following a decision late Wednesday by the city's district planning committee, Peace Now spokeswoman Hagit Ofran told AFP.

"They've approved the request, and now they're allowed to build," she said.

In March 2010, the interior ministry announced a plan to build 1,600 settler homes in Ramat Shlomo, an ultra-Orthodox Jewish neighbourhood in mainly Arab east Jerusalem.

The announcement came as US Vice President Joe Biden was visiting Israel, provoking fierce American opposition and souring relations with Washington for months.

In November 2013, the plan passed a further stage of approval but construction was held up because the planning committee said new roads must be built first, Peace Now said.

"The plan (for 900 units) has been approved even though they don't have the roads," Ofran said.

The plan was approved as Netanyahu was in the final stages of piecing together a coalition government that will include the far-right Jewish Home, which strongly backs settlement building and opposes a Palestinian state.

President Barack Obama's administration has had a cold relationship with Netanyahu, notably over continued settlement building which the international community views as a major obstacle to peace with the Palestinians.

In his reelection campaign in March, Netanyahu vowed to step up settlement construction in east Jerusalem, which Israel captured in 1967 and later annexed in a move never recognised by the international community.