According to a statement issued by the Prime Minister's Office, the planned neighbourhood in the settlement of Dolev will include about 300 new residential housing units, reports Xinhua news agency.
Netanyahu said the move comes in response to a deadly Palestinian bombing attack on Friday, which claimed the life of a 17-year-old Israeli girl and injured her brother and father.
"We will deepen our roots and strike at our enemies. We will continue to strengthen and develop settlements," he said.
Netanyahu is on a re-election campaign ahead of the September 17 parliamentary polls and the expansion of settlements is a move sought by his right-wing electoral base.
Violence has been on the rise in the West Bank over the past weeks, stoked by clashes between Israeli police and Palestinian worshippers in East Jerusalem's Al-Aqsa Mosque compound, a holy site revered by both Muslims and Jews.
Tensions have been also high along the Gaza Strip border.
The settlements are located in the West Bank which was seized by Israel in the 1967 Middle East war. Israel has since controlled the predominantly Palestinian territory despite international criticism.
The Jewish settlements are illegal under international law and most of the international community considers them an obstacle to peace between Israelis and Palestin.
( With inputs from IANS )