The ministry has allocated 850,000 Israeli shekels (roughly $215,000) to the expansion of the West Bank's Efrat settlement, according to Israeli newspaper Haaretz.
The decision was made last October "despite Prime Minister Benjamin Netanyahu having reversed the decision to build on the site," the paper reported.
According to Haaretz, the site of the planned expansion, known as the Eitam Hill, "has been a strategic target of settlers for the past decade."
"When the separation barrier was planned, the settlers fought for the hill's inclusion west of the fence [the West Bank separation barrier]. Their efforts failed, however, as did a number of attempts to build an outpost on the site," the paper added.
The West Bank separation barrier effectively isolates nearly ten percent of the West Bank, according to UN reports.
Israel hopes to acquire all West Bank land west of the barrier in any final settlement with the Palestinians.
In recent years, Palestinian, Israeli and international rights groups have all criticized increased Israeli settlement activity.