The British government has criticised the "dangerous precedent" set by Benjamin Netanyahu's government after he reached a compromise on a controversial outpost in the West Bank.

The Israeli Prime Minister ensured that a right-wing legislative challenge to the demolition of the Ulpana outpost failed on Wednesday, but in doing so approved the construction of 851 new units elsewhere in the West Bank.

The Foreign Secretary, William Hague, said that he condemned the decision.

"While we appreciate the Israeli Government's efforts to avoid damaging legislation in the Israeli Knesset by voting against a bill to legalise West Bank outposts, the decision to move settlers from an illegal outpost by creating housing units in settlements elsewhere across the Green Line sets a dangerous precedent," he said.

"Settlement construction is illegal under international law, an obstacle to peace and should stop immediately - in line with Israel's own commitment."

He said that he urged the Netanyahu government to "change its approach, to meet its international obligations fully and for both sides to engage constructively in the search for peace".