Palestinian spokesman Ahmed Tibi denounced the construction plans as a violation of the peace accords that would "bring a serious response." He demanded that the United States intervene.
U.S. Mideast envoy Dennis Ross is returning to the region to supervise implementation of the new land-for-security agreement, and his first stop is a meeting Friday with Palestinian leader Yasser Arafat.
Prime Minister Benjamin Netanyahu's decision to give the go-ahead for construction of the Har Homa neighborhood on a hotly contested Jerusalem hilltop came after months of delay. It was seen as an attempt to blunt criticism from hard-line cabinet ministers, coalition allies, and key constituents.
The project is in an area that Palestinians view as part of the capital of a future state. Israel claims Jerusalem as its "eternal" and indivisible capital.
In a political blow to Netanyahu, the Wye accord was approved Wednesday by only eight of 17 cabinet ministers, with four opposed. Five ministers, all members of Netanyahu's Likud Party, abstained.
As the cabinet voted, thousands of Jewish settlers staged a protest rally in Tel Aviv, and leading Likud legislators said the time had come to topple Netanyahu. The right-wing rally took place in the same square in which a Jewish exremist shot dovish Prime Minister Yitzhak Rabin to death after a 1995 peace rally.
Later this month, parliament is to vote on a bill to call early elections, and several hard-line members of Netanyahu's coalition are expected to back the legislation.
In bringing the accord to the ministers, Netanyahu attached several conditions that set the stage for new crises with the Palestinians. Among the caveats was a threat to annex parts of the West Bank if the Palestinians declare independence unilaterally in May.
Under the peace deal, Israel is to begin a phased withdrawal from 13 percent of the West Bank in return for Palestinian security measures against Islamic militants. The withdrawal is to be completed by the end of January.
Netanyahu promised the ministers that the cabinet will meet before each stage of the pullback to vote on whether the Palestinians were meeting Israel's security demands. If not, ministers would have the option to halt the process by voting against the next phase.
Netanyahu said the agreement would stop altogether if the Palestine National Council, the Palestinian parliament-in-exile, does not hold a formal vote by mid-December to revoke clauses in the PLO founding charter that call for Israel's destruction.
Under the agreement, the PNC is to convene to reaffirm changes it voted on in April 1996, but the accord does not directly mention a vote.
Another condition wathat any additional pullback would turn over no more than 1 percent of the West Bank to Arafat's control before scheduled "final status" talks begin.
Wednesday's vote had been delayed several times, in part because of a suicide bombing in Jerusalem by an Islamic militant last week. Netanyahu adviser David Bar-Illan said the first pullback likely would not begin for at least another week, following a parliamentary vote scheduled on Tuesday.
Parliamentary approval is necessary to begin the withdrawal. However, because of a promised "safety-net" of left-wing opposition votes, the accord is likely to pass easily.
Palestinian officials said the latest conditions imposed by Israel were violations of the accord signed in Washington on Oct. 23.
"We spoke to the American administration and filed an official complaint regarding the conditions. We asked Mr. Netanyahu before to stop the threats and conditions, but he chose threats, which means he does not want there to be trust between us," said an angry Saeb Erekat, a senior Palestinian official who helped negotiate the accord.
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