Arab foreign ministers meeting in Libya have agreed to raise a fund of $500m to support Palestinians living in Jerusalem.
The ministers, who are in the Libyan city of Sirte ahead of an Arab League summit over the weekend, hope the fund will help counter Israel's settlement drive within the Holy City.
"Yes, they have agreed," Amr Moussa, the Arab League's secretary general, told reporters when asked if the fund had been approved.
Final ratification will come when the decision is submitted to Arab leaders when they gather on Saturday and Sunday.
The Middle East peace process is set to dominate the summit after Israel angered Palestinian and Arab leaders earlier this month when it announced plans to build 1,600 new homes for Jewish settlers in East Jerusalem.
Riyad al-Malki, the Palestinian foreign minister, said: "It is a modest amount compared to what Israel and the Jewish communities around the world spend on settlements in East Jerusalem and which amounts so far to more than $17.4bn."
A senior Palestinian official said the money would go towards improving infrastructure in mostly Arab East Jerusalem, building hospitals, schools, water wells and providing financial support to those whose homes have been demolished by the Israelis.
"We are not asking for too much or for the impossible, or even for an amount of money which our Arab brothers cannot match," al-Malki said.
He said the fund was much-needed "support if we really want to bolster the presence of Palestinians in Jerusalem."
Israel's settlement plans have also frustrated its allies and prompted a growing rift with Washington, a staunch supporter of Israel.
The US has demanded Israel make some concessions to bring the Palestinians back to the negotiating table after they abandoned indirect talks following the settlement announcement.
But Binyamin Netanyahu, the Israeli prime minister, has since confirmed plans to expand the Jewish presence in occupied East Jerusalem.
In a speech to America's influential Jewish lobby in Washington on Monday, Netanyahu said that "Jerusalem is our capital" and building will continue there as Israel sees fit.
Separately, ahead of the summit, Hoshyar Zebari, the Iraqi foreign minister, briefly walked out as a protest at a meeting between Muammar Gadaffi, the Libyan leader, and Iraqi opposition figures.
He declined to elaborate on the spat between Tripoli and Baghdad, but said "there were some negative positions concerning political developments in Iraq."