The plan, which will offer prospective buyers a huge discount on 930 new homes to be built in Har Homa, will be discussed by Jerusalem municipality's finance committee on Monday, army radio and the Maariv newspaper reported.
The reports emerged as US secretary of state John Kerry was wrapping up an intensive four days of shuttle diplomacy toing and froing between Israeli Prime Minister Benjamin Netanyahu and Palestinian president Mahmud Abbas in a bid to coax them back to direct negotiations.
If approved, the plan will lower the price of each new home by 100,000 shekels ($27,500 or 21,000 euros) in a move which will be funded by the housing ministry.
Har Homa is located on east Jerusalem's southern outskirts, and construction there is likely to have a serious impact on the sector's boundary with the rest of the West Bank, analysts say.
Last week, on the eve of Kerry's arrival, the municipal planning committee granted final approval for a further 69 new homes in another area of Har Homa.
The plan to build more than 900 houses in Har Homa was approved in 2011, with tenders issued and construction companies waiting in the wings to start work, but it has been on hold because of its sensitivity, Maariv said.
Jerusalem councillor Elisha Peleg, a member of Netanyahu's rightwing Likud party, made no effort to hide his delight.
"The temporary suspension of construction in east Jerusalem is over, despite the visit of Secretary of State Kerry," he told army radio.
"There is no reason to halt construction any more, because it is now proved that stopping construction in east Jerusalem has not brought about a renewal of negotiations with the Palestinians but has caused a severe shortage of housing," he said.
The reports were not well received in Ramallah, where chief Palestinian negotiator Saeb Erakat said it proved how serious Israel was about restarting talks.
"This is Netanyahu's response to everything Kerry said, to his ideas and to all his efforts," he told AFP, noting that the news emerged "before Kerry wraps up his tour".
"We on the Palestinian side tried every possible effort to help Kerry succeed, but it is obvious today... that Netanyahu is putting 930 obstacles in front of secretary Kerry's efforts," he charged.
"Netanyahu alone is responsible for ruining Kerry's efforts and trying to abort his mission and destroying the two-state solution which is supported by the entire international community."
Earlier this month, housing minister Uri Ariel, himself a hardline settler, implied that there had been a de facto freeze on new housing projects in the West Bank including east Jerusalem since the start of the year.
And in May, settlement watchdog Peace Now said that no new tenders had been issued for West Bank homes as press reports suggested Netanyahu had agreed to "rein in" construction to help Kerry's efforts.
Israel seized east Jerusalem during the 1967 Six-Day War and later annexed it in a move never accepted by the international community. It does not see construction there as settlement building.
But the Palestinians want east Jerusalem as the capital of their future state.
They have said they will not return to direct talks unless Israel completely halts settlement construction and accepts the 1967 lines as the basis for negotiations.
Although Israel has expressed a willingness to talk, it has insisted it would only do so if there were no such "preconditions".
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