First, buried deep in the story is the news that two Israeli teenagers were seriously wounded in a Palestinian rocket strike on Sderot, a town in Israel proper near the Gaza border. This highlights one of the reasons pro-Israel writers get really frustrated by coverage of the conflict. There are very few ethical frameworks in which the deliberate--and successful--attempt to harm two innocent teenagers via rocket attack is of less moral concern than is the building of a few dozen houses in the desert. This doesn't require us to discount the manner in which settlements pose an obstacle to peace. Even if we take the expressed Palestinian position that these settlements constitute "theft," robbery is less serious a crime than attempted murder. The rocket strike was not only a deliberate attempt to kill or maim innocent civilians, but it was done with the express motivation of sabotaging the peace process. It deserves more than three paragraphs of coverage. And when it is buried like it is here, and makes Jews around the world--myself included--feel like anti-Semitic violence (I completely and utterly reject that deliberate violence targeted at Israeli civilians is anything but anti-Semitic) is something the world simply does not care about.
Second, on the decision itself. On face, it is a spectacularly stupid and wrongheaded move. However, there may be some method to the madness.
One Israeli official hinted that the new settlement might be part of a deal with Jewish settlers to get their tacit acceptance of the removal of illegal settlement outposts from the West Bank.
I'm not sure what to do with this data point. If this is true, and if it plays out exactly as planned, then it might be worthwhile. But those are two big "ifs" (and the "might" is fuzzy too). I'm not convinced that such a trade will be made. And if it isn't, then the decision loses any and all justification and becomes something that everyone--pro-Israel commentators included--ought to condemn.
Update: Marty Peretz claims that the Jordan Valley (where this settlement is being built) has few to no Arab residents outside Jericho. I have no idea if that's true--I have heard it is sparsely populated. He also argues (plausibly, to my ear) that Jordan privately demands that Israel remain in control of its border with the West Bank, lest the new Palestine destablize the kingdom (which is ruled by a minority family but is majority Palestinian).