An Israeli committee on Wednesday legalised the unauthorised settler outpost of Shvut Rachel in the northern West Bank and approved a plan for 500 new homes there, a local official said.
The plan was approved by the higher planning council of the Israeli civil administration, the military body that manages civilian affairs most of the West Bank.
According to local settler council head Avi Roeh, the committee formally issued the outpost with a zoning plan for 500 homes, conferring legal status upon it.
"The residents will no longer be considered outlaws," he told AFP, while saying it was likely to take years before they could start building.
"At least now, we will be able to erase the name Shvut Rachel from Talia Sasson's outpost list," he said, referring to government-commissioned report on the phenomenon of unauthorised settler outposts.
The committee also agreed to retroactively legalise approximately 100 homes already built there, as well as 95 homes without permits in the nearby settlement of Shilo, he said.
Earlier, civil administration spokesman Guy Inbar had told AFP the committee was to approve plans for 500 new homes and retroactively legalise around 200 others in Shvut Rachel and the nearby settlement of Shilo.
Shilo is a settlement with 2,000 residents which lies some 30 kilometres (18 miles) south of Nablus. Shvut Rachel, is a nearby outpost which is home to 400 people.
Yariv Oppenheimer, head of the settlement watchdog Peace Now, described the move as "one of the biggest projects in the territories."
The decision proved Prime Minister Benjamin Netanyahu was "doing everything he could to prevent the creation of two states for two peoples," he told AFP.
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The plans provoked an angry reaction from the Palestinian Authority, which said the aim was to destroy any chance of a two-state solution to the decades-long conflict.
"These decisions are designed primarily to attack and destroy the option of the two-state solution," Palestinian negotiator Saeb Erakat told AFP.
"We strongly condemn this new settlement decision, which once again confirms beyond any doubt that the government of Israel has chosen settlement instead of peace."
He also pointed the finger at the Quartet of Middle East peacemakers, which comprises diplomats from Russia, the United Nations, the European Union and the United States.
"There are some parties of the Quartet that provide protection for Israeli settlement practices and its continued occupation of the Palestinian territories," he said.
"It is time for these countries to increase the pressure on Israel's practices against the Palestinian people and stop dealing with Israel as a country above the law."
The UN's Middle East envoy Robert Serry condemned the move as "deplorable" and said it "moves us further away from the goal of a two-state solution."
Israel considers settlement outposts built without government approval to be illegal and often sends security personnel to demolish them, although in recent months the government has announced its intention to retroactively legalise a number of them.
More than 310,000 Israelis live in settlements in the occupied West Bank and the number is constantly growing.
Another 200,000 live in a dozen settlement neighbourhoods in east Jerusalem, which was captured by Israel in 1967 and annexed in a move never recognised by the international community.
The international community considers all settlements in territories occupied by Israel since the 1967 Middle East war are illegal, whether or not approved by its government.