"The plan was given to a private firm to demolish the houses and building housing units and settlements in the Old City in Jerusalem," said Hatem Abdul-Qader, Jerusalem affairs' commissioner in President Mahmoud Abbas's Fatah party.
"The plan is based on reducing the Palestinian presence in Jerusalem," Abdul-Qader told Voice of Palestine radio, adding that Israel "is terrified from the demographic situation 42 years after it has occupied the city."
Meanwhile, Abdul-Qader said Israel Antiquities Authority (IAA) was still conducting excavations to the south of al-Aqsa mosque, the Muslims' third shrine, without an intervention from the UNESCO which had declared the area a protected World Heritage site.
The Palestinians recognize East Jerusalem as their future capital but Israel refuses to share the city which was occupied in1967.
Earlier this month, the European Union (EU) called on Israel and the Palestinian National Authority (PNA) to resume peace negotiations on Jerusalem as a future capital of two states.
The Israel procedures in East Jerusalem and the building of settlements in the West Bank are the biggest obstacles to a restart of the peace talks.