The move, which was unanimously approved by the Security Cabinet and is waiting a final go-ahead from the wider cabinet, is meant as compensation for the settlement of Amona, which was demolished more than a month ago after Israel's Supreme Court ruled that it was built on land privately owned by Palestinian farmers.
Prime Minister Benjamin Netanyahu has been under pressure at home to uphold his promise to the 40 families evicted from Amona to resettle them on an alternative parcel of land in the West Bank.
If the plan for the new settlement goes ahead, it would contradict a request by President Donald Trump in February for Israel to "hold back" on settlements until an understanding is reached between the two governments on the issue.
A team of Israeli officials, led by Israel's ambassador to the United States, Ron Dermer, met last week with Jason Greenblatt, Trump's special representative for international negotiations, to find a solution. The talks, however, ended in a stalemate, with the White House expressing its "concerns" about settlement construction.
Israel's settler movement has expected Trump to be more supportive of their goals to expand their communities in the West Bank after eight years of restrictions and criticism during the Obama administration.
Greenblatt has expressed the Trump administration's interest in restarting the stalled peace process between the two sides. But a new Israeli settlement could make achieving that goal even more difficult.
Greenblatt visited the region earlier this month, meeting with Netanyahu and Palestinian Authority President Mahmoud Abbas.
According to Israeli human rights group B'tselem, roughly 125 settlements have been built on land Israel occupied after the 1967 war with Jordan. Israel has continued to build additional housing units inside those settlements over the years.
In addition, there are a further 100 outposts, or small communities, viewed as illegal even by the Israeli government.
Palestinians oppose the existence of Israeli settlements, seeing them an expansion of Israel into territory they hope will one day be part of a Palestinian state. Much of the international community views Israeli settlements as illegal.
"Israel's relentless efforts to expand its illegal settlement enterprise with the aim of displacing Palestine and replacing it with 'Greater Israel' should send a strong message to governments worldwide that they need to intervene immediately and to undertake concrete measures to hold Israel accountable with serious punitive measures," said Hanan Ashrawi, a member of the Palestine Liberation Organization's executive committee.
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