Palestinian owners will be offered financial compensation or new plots of land if the plan goes ahead.
Last week the White House commented that settlement expansion may “not be helpful” to peace process although it did not see the existence of settlements as an impediment to it.
Yachad, the British group campaigning for a two-state solution, condemned the legalisation law as "disastrous", echoing former Israeli Foreign minister Tzipi Livni who described it as "legitimising theft".
The British government also criticised the new law.
Tobias Ellwood, the Minister for the Middle East, said: “It is of great concern that the Bill paves the way for significant growth in settlements deep in the West Bank, threatening the viability of the two-state solution.
“As a longstanding friend of Israel, I condemn the passing of the Land Regularisation Bill by the Knesset, which damages Israel’s standing with its international partners.
“We reiterate our support for a two-state solution leading to a secure Israel that is safe from terrorism, and a contiguous, viable and sovereign Palestinian state.”
