The homes in Silwan, which sits in the shadow of Jerusalem's Old City, were purchased by Elad, a pro-settlement group that uses funds from Jewish supporters in the United States and elsewhere to buy properties in Palestinian districts.
Tuesday's move was the largest purchase of homes in Silwan since the process began in the neighborhood in 1986, taking to 26 the number of settler-owned properties, local officials said. Around 90 settler families, totaling 500 people, live in Silwan among some 50,000 Palestinians. Israeli police protect them.
"This is a government by the settlers for the settlers," said Saeb Erekat, the Palestinians' chief peace negotiator, calling the move an attempt to erase Palestinian identity.
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"It serves the objective of altering the character of Jerusalem through isolating, containing and confining Palestinian existence, allowing for more Israeli land-grabs."
Israel annexed East Jerusalem after its capture in the 1967 war, when the West Bank and Gaza Strip were also seized. Citing historical and Biblical roots, Israel regards all of Jerusalem as its capital, a claim not recognized internationally.
Residents of Silwan, a tightly packed neighborhood of winding streets on the side of a hill, acknowledged on Tuesday there is little they can do to stop settlers from moving in.
In the latest case, all of the homes were purchased legally by Elad via intermediaries, usually Palestinian brokers who buy the properties from local families at inflated prices.
At one house, Khaled Karaeen, 62 and a father of six, sat with his head in his hands in the courtyard of his home, edgily flicking worry beads, unable to believe what had happened.
Relatives said one of Karaeen's sons had sold a dwelling inside the grounds of the family home to a Palestinian broker about a year ago for 1.2 million shekels ($300,000), around twice as much as the property was probably worth.
The broker had then sold the apartment to Elad, which then rented it out to the settlers, who moved in during the early hours of Tuesday morning with the help of Israeli police.
By Tuesday afternoon the settlers had moved a washing machine into the property and an Israeli-brand shower wash was visible on the sill of the bathroom window.
The family, which declined to be interviewed, had barricaded themselves inside, blocking a yellow door that opens onto Karaeen's courtyard. Karaeen sat three meters (10 feet) away.
"They want to make a joke of us," said Fadi Maragha, a local representative of the Palestinian political party Fatah, who said he had come to offer support to the family. As he spoke, a muezzin made the call to prayer from a nearby mosque.
"They think they can drive us out. But we are the landowners. We were here and we will be here until we have all of Palestine without any Jewish people in it," he said.
Looming over the house, barely 300 meters (yards) away, is the southern wall of the Old City, with the Dome of the Rock and the al-Aqsa mosque, one of Islam's holiest sites, sitting on top. Jews also revere the site as the Temple Mount.
Silwan has long been an objective for settler organizations, with many Jews believing that the ancient City of David once stood where the Palestinian neighborhood now stands.
Palestinians want East Jerusalem as the capital of a future state and say Israeli settlements undermine that objective.
Karaeen refused to speak to visitors on Tuesday, with family members saying he was too ashamed by what his son had done. Karaeen's brother said he had spoken by phone to the son, who had fled to the north of Israel.
In the past, Palestinians found to have sold their homes to settler organizations have been killed.
Asked what would happen to the son and the broker to whom he had sold the property, Maragha said he felt they should die, but he did not expect that to happen.
"We know who the broker is. He's living in a town south of Jerusalem," he said. "But he's rich and he's protected, including by the Israelis."