Settlers entered the five-story building in Jabal al-Mukabbir and took over three of the ten apartments, Wafa said. The owner of the building, Suleiman Abu Diab, lives on the top floor with the other nine apartments vacant.
The building was constructed 10 years ago and was issued a demolition order from Israel's Jerusalem municipality, the Wadi Hilweh center said.
Peace Now settlement watch director Hagit Ofran said the move is "not only a dangerous provocation which is threatening the stability in the fragile situation of Jerusalem, but also a threat to the possibility to get to a two states solution and a compromise in Jerusalem."
Coming three days after the Israeli government authorized mass settlement construction in response to Palestine's status upgarde at the UN, is "no accident," she said.
"It seems as if the Government has set the norm, and showed that it wishes to establish as many settlements as possible, to prevent the two states solution," she said.
The Jabal al-Mukabbir settlers were supported by the Elad organization, which claimed ownership of the apartments, Wafa added.
The Elad association is a private Israeli organization which promotes settlement building in East Jerusalem. The US state department in July criticized the group for disregarding the diverse religious history of sites it controls in East Jerusalem.
Israel captured East Jerusalem in 1967 and later annexed it in a move never recognized by the international community. Palestinians seek East Jerusalem as the capital of their hoped-for state.