The decision came on the same day as the first phone conversation between Trump and Netanyahu since the inauguration.
The approval came after Israel postponed authorization of hundreds of other homes ahead of a speech on the Middle East by the U.S. secretary of state.
Separately, the envoys of 10 other nations were called in to the Israeli Foreign Ministry to be reprimanded on Sunday.
Hamas claims the attacker was a member of its group.
While Israel calls Jerusalem its capital, few other countries accept that, including the United States.
The Al-Aqsa mosque is just one part of a much more complicated problem.