A widely condemned Israeli settlement plan that would cut across land which the Palestinians seek for a state has received final approval, according to a statement from Israeli finance minister Bezalel Smotrich.

The approval of the E1 project, which would bisect the occupied West Bank and cut it off from East Jerusalem, was announced last week by Mr Smotrich and received final go-ahead from a defence ministry planning commission on Wednesday, he said.

Restarting the project could further isolate Israel, which has watched some western allies – frustrated by its continuation and planned escalation of the Gaza war – announce that they may recognise a Palestinian state at the United Nations General Assembly in September.

“With E1 we are delivering finally on what has been promised for years,” Mr Smotrich, an ultra-nationalist in the ruling right-wing coalition, said in a statement. “The Palestinian state is being erased from the table, not with slogans but with actions.”

The Palestinian foreign ministry condemned the announcement on Wednesday, saying that the E1 settlement would isolate Palestinian communities living in the area and undermines the possibility of a two-state solution.

A German government spokesperson commenting on the announcement told reporters that settlement construction violates international law and “hinders a negotiated two-state solution and an end to the Israeli occupation of the West Bank”.

Israeli prime minister Binyamin Netanyahu has not commented on the E1 announcement.

However, on Sunday, during a visit to Ofra, another West Bank settlement established a quarter of a century ago, he made broader comments, saying: “I said 25 years ago that we will do everything to secure our grip on the land of Israel, to prevent the establishment of a Palestinian state, to prevent the attempts to uproot us from here. Thank God, what I promised, we have delivered.”

The two-state solution to the decades-old Israeli-Palestinian conflict envisages a Palestinian state in East Jerusalem, the West Bank and Gaza, existing side by side with Israel.

Western capitals and campaign groups have opposed the settlement project due to concerns that it could undermine a future peace deal with the Palestinians.

The plan for E1, located adjacent to Maale Adumim and frozen in 2012 and 2020 amid objections from the US and European governments, involves construction of about 3,400 new housing units.

Infrastructure work could begin within a few months, and house-building in about a year, according to Israeli advocacy group Peace Now, which tracks settlement activity in the West Bank.

Most of the international community considers Israeli settlements in the West Bank illegal under international law.