The Emek Shilo settlement is intended for settlers evicted from Amona, a West Bank outpost razed in February on Israeli court orders because it was illegally built on private Palestinian land.
UN Secretary-General Antonio Guterres has lambasted Israel's decision to build a new settlement on private Palestinian land in the occupied West Bank.
The UN chief's spokesperson said that Guterres expressed "disappointment and alarm" after Israel's security cabinet on Thursday approved the building of the first new settlement in the occupied West Bank in two decades.
The new settlement in Emek Shilo is intended for settlers evicted from Amona, a West Bank outpost razed in February on Israeli court orders because it was illegally built on private Palestinian land.
The US appeared more accommodating to Israel's plans for the new settlement, as the White House refrained from criticising the approval.
The US administration, however, warned that further expansion could undermine peace efforts.
EU foreign policy chief Federica Mogherini said the new settlement threatens "to further undermine prospects for a viable two-state solution."
Palestinians want the West Bank and East Jerusalem for their own state, along with the Gaza Strip.
The UN Security Council adopted a resolution in December that demanded a halt to settlement building, after the Obama administration abstained from the vote instead of vetoing the move.
TRT World 's Nick Davies Jones reports.