The Amichai settlement will be the first new government-sanctioned Jewish settlement in the Palestinian territories in some 25 years.
It is being built for the roughly 40 families evicted from the wildcat outpost of Amona earlier this year after Israel's high court ruled their homes had been built illegally on private Palestinian land.
"Today, the work on the ground has begun, as I promised, to establish a new settlement for the Amona settlers," Netanyahu tweeted over a picture of a small bulldozer and a digger working.
"After dozens of years, I have the privilege to be the prime minister building a new settlement in Judaea and Samaria," Netanyahu tweeted, using the Hebrew biblical term for the West Bank.
On the site in the mid afternoon, a single Caterpillar bulldozer was clearing rocks and rubble to create a path near a vineyard, while four others stood idle.
The bulldozer's driver, a kippah-wearing Israeli who said he was from a settlement in the southern West Bank, said they were laying the foundations for two new roads that would lead to the new settlement.
The land is surrounded by a number of other small settlements and is a few kilometres from the Palestinian village of Duma, where a Palestinian family were burned alive by radical settlers in 2015.
While Israel has not launched new settlements in recent decades, extensive construction has focussed on expanding existing settlements.
'Thwarting Trump'
Netanyahu's announcement comes a day after Trump's special representative Jason Greenblatt arrived for talks with Israeli and Palestinian officials on relaunching peace talks that collapsed in 2014.
Greenblatt is to be joined by Trump's son-in-law and adviser Jared Kushner on Wednesday.
Together they will "spearhead the peace effort" the US administration believes is possible, a White House official said.
Jewish settlements in the West Bank, including Israeli-annexed east Jerusalem, are illegal under international law and are considered one of the main obstacles to peace.
The international community considers all Jewish settlements in the West Bank illegal but Israel draws a distinction between those it sanctions and those it does not, so-called outposts.
Trump has asked Netanyahu to hold back on settlement building as he seeks to build momentum for a new peace push.
But the Israeli leader faces political pressure from the settler movement, which wields strong influence in his right-wing governing coalition.
Palestinian president Mahmud Abbas's spokesman, Nabil Abu Rudeineh, called the new building work a "serious escalation," in a statement published by official Palestinian news agency Wafa.
The project, he said, was "an attempt to thwart the efforts of the American administration, to thwart the efforts of US President Donald Trump."
Ahead of the arrival of the two envoys, the White House urged both Israel and the Palestinians to "create an environment conducive to peacemaking".
"Those who want to make it harder rather than easier to make peace, whether by their statements or their actions, must be prevented from subverting the chances for peace," the official said.
Tuesday's ground-clearing work was in preparation for the installation of dozens of mobile homes for the families evicted from Amona, a spokesman for the main settler organisation, the Yesha Council, said.
The settlers would live in the temporary accommodation while work continues on building more permanent homes, the spokesman added.
