The new settlement, located in the Golan Heights, will be named "Ramat Trump" which means "Trump Heights" in English, according to Prime Minister Benjamin Netanyahu.
"We will start today with practical steps to construct Ramat Trump in the Golan Heights," Netanyahu said at the start of the weekly cabinet meeting.
"The initiative to establish a new Golan Heights settlement to be named after President Donald Trump expresses gratitude for his work for ... Israel and the Golan Heights," the cabinet said in a statement.
Currently known as Bruchim, the settlement is over 30 years old and has a small population of about 10. However, Tel Aviv hopes it can encourage "a wave of residents" to expand it once the construction work begins there in three weeks time.
The Israeli cabinet approved 8 million Shekels (about $2.3 million) in funding in order to take practical steps to start building the Trump Heights as a gesture of gratitude for Trump's decision to ditch decades of US foreign policy and recognize Israeli sovereignty over the Golan Heights on March 25 of last year.