A statement after a meeting of the country's security cabinet said the construction would take place in the Emek Shilo area near Nablus.
Prime Minister, Benjamin Netanyahu, has been simultaneously negotiating with the US government on reducing settlement activity.
Palestinian officials have however condemned the move, through Hanan Ashrawi, an executive committee member of the Palestine Liberation Organisation.
The administration of US President Donald Trump has yet to comment on the Israeli vote, which was unanimous.
The new settlement will be used to house Jewish families evicted from Amona, an outpost that was cleared last month after the Israeli Supreme Court ruled it had been built illegally on private Palestinian land.
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