An Israeli ministerial committee has voted to support a bill allowing Israeli settlers in the West Bank to remain in homes built on privately-owned Palestinian land.
Israel's Supreme Court had ruled the government must evacuate a few dozen families from Amona settlement and return the land to its Palestinian owners.
But nationalist parliamentarians want to pay Palestinians compensation, or offer alternative plots of land, and allow the settlers to stay.
Mr Netanyahu's government had sought an extension for the end-of-year evacuation so somewhere else could be found for the settlers to live.
But ministers in Mr Netanyahu's coalition, including education Minister Naftali Bennett from the Jewish Home party, ignored his call to postpone the vote.
"This bill is a bill of normalisation to finally tell them (the settlers) you are no longer second-class citizens."
There are about 100 unauthorised settlement outposts in the West Bank, where more than 350,000 Israelis live in other settlements built with Israeli government permission.
Palestinians have denounced the proposed law as another blow to the establishment of a Palestinian state in the West Bank and Gaza Strip, that's gained widespread international support.
Hanan Ashrawi, a senior member of the Palestine Liberation Organisation, describes the bill as supporting outright theft.
"We consider all settlements illegal weather they are on public land or private land, but now it extends the confiscation of territory to private Palestinian land where Settlers and the illegal Israeli occupation can steal --outright theft - Palestinian land, whether for public Palestinian use or private Palestinian property, in order to expand its settlement project, destroy the two-state solution and at the same time impose greater Israel on historical Palestine."
Many countries, and the United Nations, view all Israeli settlements on Palestinian land as illegal and Mr Netanyahu had sought to delay the legislation, apparently concerned it may draw further US criticism.
Amona resident Elad Ziv says he expects the Israeli government to make the right decision, claiming Jews cannot be called occupiers on their own historic land.
"We expect a right-wing government to implement a right-wing solution, and this is the right solution, this is the just solution to let us stay and live here and to compensate any Arab who has a claim, real claim over the land who can prove it."
Israel's attorney-general says the proposed legislation probably violates international law and it would be difficult to defend it against any challenges in the Supreme Court.
Israel's Opposition leader, Isaac Herzog, has condemned the proposal.
"Never in the history of the State of Israel, never, did the Knesset vote totally against the State's laws, to the rule of law and the international law. This is a law that recognises robbery and theft."
The bill, which must still pass three more votes in parliament, is likely to face further legal challenges.
Share
