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 condemned the move.
"Today's announcement once again proves that Israel is more committed to appeasing its illegal settler population than to abiding by the requirements for stability and a just peace," Hanan Ashrawi, an executive committee member of the Palestine Liberation Organisation, was quoted as saying by Reuters news agency.
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.
Mr Netanyahu then promised Amona residents that a new area would be found for them.
The issue of Jewish settlements in the West Bank and East Jerusalem has long been a major source of dispute between Israel and the Palestinians.
More than 600,000 Jews live in about 140 settlements built since Israel's 1967 occupation of the West Bank and East Jerusalem.
The settlements are considered illegal under international law, although Israel disputes this.
Israel's pro-settlement government, which had sharp differences with Barack Obama administration on the issue, felt emboldened when Donald Trump took office in January.
Since then, it has authorised 6,000 new settlement homes, in one of the biggest surges for years.
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