A municipality spokeswoman said the local planning committee had approved requests by private contractors who purchased the land years ago for the construction of 144 homes in Har Homa and 40 dwellings in Pisgat Zeev.
Hanan Ashrawi, a senior member of the Palestine Liberation Organization (PLO), accused Israel of trying to derail US-sponsored peace talks in which the future of settlements on land that Palestinians want for a state is a major issue.
"It is has become evident that Israel has done everything possible to destroy the ongoing negotiations and to provoke violence and extremism throughout the region," Ashrawi said in a statement.
Israel says Palestinian refusal to recognize it as a Jewish state – a step Palestinian leaders say was already taken in interim peace deals – is the main stumbling block.
Har Homa and Pisgat Zeev settlements are in a part of the West Bank that Israel annexed to Jerusalem after capturing the territory in the 1967 Six-Day War.
Israel regards Pisgat Zeev and Har Homa as neighbourhoods of Jerusalem that it would keep under any future peace deal with the Palestinians.
The two sides resumed US-brokered peace talks in July, but the negotiations have made no significant progress. Washington is struggling to formulate agreed principles that would extend the talks beyond an original April target date for a final deal.