Israeli Prime Minister Benjamin Netanyahu said that hundreds of new settler homes would be built in the West Bank after MPs rejected a bill to prevent the razing of buildings in one neighbourhood.
Netanyahu had opposed the bill, which would have circumvented a Supreme Court ruling ordering the dismantling of five buildings in the Ulpana neighbourhood of Beit El -- a wildcat settlement built on private Palestinian land -- by legalising outposts.
But he warned after the vote he would not allow people to "use the legal system to harm the settlement movement," and announced plans to add 300 new homes to Beit El, near the city of Ramallah.
"Beit El will be expanded. The 30 families will remain in Beit El, and 300 new families will join them," he said in remarks relayed by public radio.
Netanyahu has backed a plan to move the five buildings in Ulpana, home to 30 families, stone by stone to Beit El itself.
"Instead of diminishing Beit El, expanding it. Instead of harming the settlement, strengthening it," he said.
Later, he announced another 551 homes would be built in other settlements in the West Bank, according to media reports.
Netanyahu has come under attack for his decision to oppose legislation to circumvent the Supreme Court ruling, but insisted his government remained a champion of the settler movement.
"I understand your pain. I share it," he said.
"There is no government that would support the settler movement more than the one I head, we will continue to strengthen the settlement movement and strengthen the democracy."
Palestinian president Mahmud Abbas slammed the decision to expand Beit El, which he said would hinder on peace efforts.
"We strongly condemn Netanyahu's announcement of the settlement decision on Palestinian land, which is an obstacle to efforts to push the peace process forward," Abbas's spokesman Nabil Abu Rudeina told AFP from Paris, where the Palestinian leader is due to meet French President Francois Hollande this week.
The Knesset vote, which saw 69 MPs oppose the legalisation bill against 22 in favour, effectively ended legislative efforts by the settler lobby and its rightwing supporters to avoid the court-mandated July 1 removal date.
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The bill sought to offer compensation to Palestinians whose private land had been taken over by settlers rather than returning their land, if they had not lodged a legal demand to evacuate the land within four years of the settlement.
A second, similar bill, was taken off the parliamentary agenda before the vote.
The planned demolition, which will affect 142 people, has sparked fury among settlers and their backers, and exposed a split within Netanyahu's own rightwing Likud party.
Before and after the vote, Netanyahu made clear he opposed the efforts because they could spark an international backlash.
"The law rejected today would have harmed the settlement movement," he said after the vote.
But the movement has responded with anger, and outside the Knesset some 2,000 people reacted with fury to the bill's failure.
"Jews do not evict Jews!" they chanted.
"This is one of the most evil things that Jews are doing to Jews, that this government is doing to Jewish people only because they are Jewish," protester Yosef Yom Tov told AFP of the planned eviction.
Among the crowd was a group of about 250 settlers who had completed a three-day march to Jerusalem from Ulpana.
Police said five people were arrested for disturbances at the Knesset where demonstrators tried to block the entrance to the building, and on the main route into Jerusalem, after they tried to block the road.
Despite a commanding majority of 94 within the 120-seat parliament, Netanyahu has struggled to rein in far-right members of Likud, many of whom said they would back the bills.
Lawmakers from the extreme right slammed Netanyahu and his party for failing to prevent the court order.
But members of the government praised the outcome of the vote, which intelligence minister Dan Meridor of the Likud called "a show of the seriousness of the government not to act outside the rule of law."
Israel differentiates between "legal" settlements and "illegal" outposts, but the international community views all settlement on occupied territory as a violation of international law.