The approval is for 700 Palestinian homes and 6,000 for Israeli settlers.
It was not immediately clear if all the homes will be new construction or if some already exist and are receiving retroactive approval.
The plan for Palestinians, though relatively small and far outweighed by the number of settlement homes, could allow Prime Minister Benjamin Netanyahu to argue he is making efforts in favour of Jared Kushner's long-awaited “Peace to Prosperity” plan, nicknamed “the deal of the century.”
Details of Kushner's planned visit to Israel as part of a Middle East tour are not yet available.
But Kushner has promised not to mention a two-state solution because "it means one thing to the Israelis, it means one thing to the Palestinians."
US ambassador to Israel David Friedman, who has been a backer of Israeli settlements, reiterated that stance in an interview with CNN late Tuesday.
Friedman said the United States was in favor of Palestinian "autonomy," but he signaled Washington was not ready to support full statehood, a stance echoing Netanyahu's position.
"The issue we have is agreeing in advance to a state because the word state conjures up with it so many potential issues that we think it does a disservice for us to use that phrase," he said.
"We believe in Palestinian autonomy. We believe in Palestinian civilian self-governance. We believe that that autonomy should be extended up until the point where it interferes with Israeli security, and it's a very complicated needle to thread."
Friedman argues that the Palestinian Authority government may currently be too weak to prevent militant groups from overrunning it, resulting in a "failed state" that threatens Israel and neighboring Jordan.
Palestinians don’t like the plan
The settlements are considered illegal under international law and are built on land that the Palestinians see as part of their future state. The Palestinians also suspended contacts with the US after President Donald Trump recognised Jerusalem as Israel’s capital and transferred its embassy there.
Israel says that Palestinian intransigence, violence and incitement are the main impediments to peace.
It later annexed east Jerusalem in a move never recognised by the international community and sees the entire city as its undivided capital.
The Palestinians see east Jerusalem as the capital of their future state.
Some 600,000 Israeli settlers now live in the West Bank and east Jerusalem among around 2.9 million Palestinians.