YayIsraeli Prime Minister Benjamin Netanyahu has ordered the construction of 300 new homes at the Jewish settlement of Beit El in the West Bank.
The announcement came hours after Israel's parliament rejected a bill to legalise settlement outposts.
Mr Netanyahu, who opposed the bill, said he would honour a Supreme Court order to demolish homes on private Palestinian land at the Ulpana outpost.
The issue has been a source of tension between settlers and the government.
All settlements in the West Bank and East Jerusalem are considered illegal under international law, though Israel disputes this.
The settler outposts are also illegal under Israeli law and the government agreed to remove them under the 2003 Road Map peace plan.
Reacting to Mr Netanyahu's announcement, a US spokesman said that "continued Israeli settlement activity in the West Bank undermines peace efforts and contradicts Israeli commitments and obligations".
"Our position on settlements remains unchanged. We do not accept the legitimacy of continued Israeli settlement activity," State Department spokesman Mark Toner said.
Last year, the Israeli government committed to remove all or part of six illegal outposts following a Supreme Court ruling.
Five buildings which are home to 30 families at Ulpana, also known as Jabal Artis or Pisgat Yaakov, were built entirely on private Palestinian land, the court found.
Before Wednesday's vote in the Knesset, Mr Netanyahu had warned that he would sack anyone in his government who supported the bill to bypass the court ruling and, in effect, legalise the buildings at Ulpana, because it would have prompted international criticism.
Ahead of the vote, hundreds of settlers marched on the Knesset, insisting on their right to live on what they said was historically Jewish land.
Ulpana is part of the bigger settlement of Beit El, which is built on land captured by Israel in the 1967 Middle East war. Palestinians say it should be part of their future state.
Hours after the legalisation of outposts was rejected, Mr Netanyahu sought to placate settlers and right-wing critics in his own Likud party by ordering the transfer of the buildings at Ulpana to a nearby former army base in another part of Beit El and the construction next to them of 300 new housing units, reports the BBC Wyre Davies in Jerusalem.
"Israel is a democracy that observes the law, and as prime minister I am obligated to preserve the law and preserve the settlements, and I say here that there is no contradiction between the two," Mr Netanyahu said.
"This formula strengthens settlements," he added. "The court ruled what it did, and we respect its decision. In parallel, Beit El will be expanded."
Mr Netanyahu's decision will infuriate Palestinians and pro-peace groups who say the Israeli government is expanding the settlements at the expense of a peace deal with the Palestinians, our correspondent adds.