Israeli authorities on Wednesday approved a major expansion of an east Jerusalem settlement, signing off on plans to add 176 homes, the city's deputy mayor said.

The expansion would create the largest Israeli settlement inside a Palestinian neighbourhood of the city, NGOs say. It will allow the Nof Zion settlement to add 176 housing units to the 91 existing homes.

The settlement is located in the annexed east Jerusalem Palestinian neighbourhood of Jabel Mukaber. The plans were approved by a Jerusalem planning committee, Deputy Mayor Meir Turjeman told AFP.

Peace Now and other NGOs say the approvals would make Nof Zion the largest Israeli settlement inside any Palestinian neighbourhood of east Jerusalem and possibly also of the occupied West Bank.

Most settlements, particularly in the West Bank, are located outside of Palestinian residential areas. They are typically far larger than Nof Zion.

Jerusalem's status is ultrasensitive and central to the Israeli-Palestinian conflict.

Israel occupied east Jerusalem in the Six-Day War of 1967 and later annexed it in a move never recognised by the international community.

It sees the entire city as its indivisible capital, while the Palestinians want the eastern sector as the capital of their future state.