The Israeli government is to advance construction plans for 1,000 housing units to be built in parts of Jerusalem that Palestinians demand for their future state.

The move, revealed by the prime minister, Binyamin Netanyahu,, is the first in what is expected to be a series of announcements this week on new settlement construction work in East Jerusalem and on the occupied West Bank.

It comes despite a warning from the US this month that continued construction would “poison the atmosphere” and distance Israel from even its closest allies.

“The government has decided to advance the planning of more than 1,000 units in Jerusalem – roughly 400 in Har Homa and about 600 in Ramat Shlomo,” an official in Netanyahu’s office said, referring to two existing East Jerusalem settlements.

The announcement was immediately condemned by the finance minister, Yair Lapid of the centrist Yesh Atid party, who warned that it would damage US-Israeli relations, which are already at a low ebb. Last week, the White House refused the Israeli defence minister’s requests to meet several top national security aides. “This plan will lead to a serious crisis in Israel-US relations and will harm Israel’s standing in the world,” Lapid said.

The disclosure of the plan comes amid a period of sharply heightened tension between Jews and Palestinians in Jerusalem, which has been the centre of daily violence in recent days.

The unrest has been exacerbated by the murder of a three-month-old baby and a Ecuadorian woman when a car driven by a Palestinian resident of East Jerusalem drove into a crowd waiting at a tram stop.

Palestinians see East Jerusalem – home to the city’s most sensitive holy sites for Jews, Muslims and Christians – as their future capital and oppose Israeli construction there. Israel has said all of Jerusalem will forever be its capital, citing historical, religious and security reasons. But the international community, including the US, does not recognise Israel’s annexation of the eastern sector of the city.

The disclosure by Netanyahu’s office of the construction plans follows the reported threat last week by the far-right economy minister, Naftali Bennett, that his party would destabilise Netayanhu’s governing coalition unless he “unfroze” settlement building.

According to Israeli media, Bennett had indicated his party would not support Netanyahu’s government in a planned no-confidence motion in the Knesset.

News of the latest proposals follows claims on Israel’s Channel 2 that the prime minister will discuss further construction plans this week, some of which are expected to be approved. Netanyahu will chair a meeting with ministers on Wednesday that will examine plans for paving up to 12 new roads on the West Bank. Also being proposed are several “students’ villages” and parks, including a promenade in the Etzion Bloc to be named after the three Israeli students who were kidnapped and murdered near Hebron this year.

The announcement comes amid mounting frustration in the international community over Israel’s continued settlement activity, regarded by many countries as illegal. Recent settlement announcements and plans – including in the East Jerusalem neighbourhood of Silwan – have been condemned by the White House and the EU.