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SHVUT RACHEL, West Bank (AP) — Israel has legalized one of the oldest and largest of the unsanctioned settler enclaves dotting the West Bank, a step denounced by the Palestinians and Israeli activists as a show of bad faith ahead of talks next week between the Israeli leader and President Barack Obama.

The dispute over settlements has confounded Washington’s attempts to revive Israeli-Palestinian negotiations, mostly on hold since 2008. Prime Minister Benjamin Netanyahu has refused to stop construction and the Palestinians say they won’t negotiate while Israel unilaterally determines the borders of their state through settlement-building.

Now, the question of outposts Israel has not formally sanctioned is coming to a head: The government is under Supreme Court orders to evacuate residents from Migron, a relatively large such enclave, by the end of March.

Aware that doing so could badly unsettle the ruling rightist coalition, officials have attempted to avoid a confrontation by persuading residents, so far unsuccessfully, to move to a nearby sanctioned settlement.

The stalled talks and dispute over settlements is bound to come up when Netanyahu meets Obama on Monday.

Shvut Rachel, home to 95 Israeli families, was established 21 years ago on a hilltop in the heart of the West Bank — an area Israel would likely have to withdraw from to make way for a Palestinian state. The settlers grabbed the land without government permission.

Now that approval seems at hand. A planning committee last week retroactively legalized 115 apartments already built or under construction in Shvut Rachel, according to government officials and the community’s acting mayor, Yaakov Moshe Levi. The move apparently resulted from pressure by peace activists to stop construction there.

In its decision, the panel also approved in principle nearly 500 more apartments, though a construction start would require further permits and could be years away, government officials said.

Hagit Ofran of Israel’s Peace Now group says this amounts to establishing a new settlement, contrary to pledges by successive governments over the past two decades not to do so. Israel’s Defense Ministry rejected that characterization, saying Shvut Rachel is a neighborhood of the nearby government-sanctioned settlement of Shilo.

Ghassan Khatib, a Palestinian spokesman, said setting up a Palestinian state alongside Israel is becoming “practically impossible” because of such construction. He denounced the Shvut Rachel decision as an escalation of Israel’s practices.

The Palestinians want to set up their state in the West Bank, Gaza and east Jerusalem, lands Israel captured in the 1967 Mideast war. However, half a million Israelis already live on war-won land, in more than 130 government-sanctioned settlements and some 100 unauthorized outposts set up by settlers who are open about their desire to impede any partition.

There is little discussion of Jewish settlers remaining in a Palestinian state and Israel has a history of using the location of settlements to stake claims on West Bank land in the context of negotiations.

On the other hand, Israeli government officials note that Israel has proven in the past that it can and will dismantle settlements. They point to the removal of Sinai settlements when the area was returned to Egypt some 30 years ago, as well as the dismantling of nearly two dozen communities in 2005 as part of the Gaza pullout.

Spokesman Mark Regev insists the current Israeli government “has shown more restraint on the issue of settlements than any previous government,” referring to a 10-month construction slowdown in 2010. He reiterated that the fate of settlements must be determined in negotiations and that Israel is willing to resume talks immediately.

But a visit to the West Bank’s heartland suggests that an Israeli withdrawal would be increasingly difficult. Settlers control many hilltops, their communities flourishing with government support, including for unauthorized outposts.

Shvut Rachel and Shilo, which also won retroactive approval for some 100 apartments last week, have spawned five more nearby outposts. Settlers operate vineyards on 3,000 acres that produce more than 50,000 bottles of wine a year, as well as an olive press that produces 12 percent of Israel’s domestic olive oil, said New York-born Yisrael Medad, a Shilo resident.

“We love the land and we build here, and after that we get formalization,” the 65-year-old said during a tour of the area Tuesday.

In Shvut Rachel and the area’s five other unsanctioned enclaves, the government has lent a hand, even while withholding formal approval. The Housing Ministry under settler patron Ariel Sharon, later Israel’s prime minister, built 68 homes in Shvut Rachel just months after it was established, even though it lacked permits, said Moshe Levi, the acting mayor.

The government also provided water, electricity and other services, just as it does for other unauthorized settler enclaves set up since the late 1990s in response to calls by Sharon for settlers to seize the hilltops.

Israel’s Defense Ministry denied last week’s decision means an outpost has been legalized. It described Shvut Rachel as a neighborhood of Shilo, home to about 300 families. The two communities are about a half-mile (kilometer) apart, on neighboring hilltops separated by a valley.

“This is not an isolated outpost. This is a neighborhood of Shilo,” a Defense Ministry spokesman said of Shvut Rachel, speaking on condition of anonymity in line with briefing regulations.

Shvut Rachel is part of Shilo’s municipal boundaries, Medad said.

However, a 2005 government-commissioned report classified Shvut Rachel as an outpost — as it has with other unauthorized enclaves, even if they were set up within the municipal boundaries of a mother settlement.

Moshe Levi said Shilo and Shvut Rachel have separate budgets and administrations.

Talia Sasson, an Israeli lawyer who wrote the 2005 report on outposts, said she was concerned the Shvut Rachel decision could pave the way for the retroactive legalization of more outposts. In her 2005 report, Sasson concluded that government agencies had funneled millions of dollars in state funds to the outposts.

Sasson said in an interview that construction in outposts has accelerated in the last two years, though their number has largely held steady. In her 2005 survey, she counted 105 outposts, including about half built at least in part on private Palestinian land.

Sharon promised Washington to dismantle outposts built after he took office in March 2001. The Defense Ministry official said three outposts have been removed. The military has also removed mobile homes and other structures in other enclaves, but settlers routinely return to the sites.

Now the Netanyahu government appears to be backing away from Sharon’s promise. In January, Netanyahu appointed a three-member committee to review land and legal issues in each outpost.

The panel was told illegal construction on private West Bank land should be removed, and was asked to put in order the planning and zoning status of Israeli construction on public lands, said committee member Alan Baker.

While Baker said the panel enjoys a broad mandate, those supporting the settlers said they hope the committee will reach favorable conclusions. Danny Danon, a hardline lawmaker, said he expects the committee “to show that most of the Jewish communities are built legally.”

Ofran, the settlement monitor, said the recent government decisions have sent a clear message to the settlers: “You build illegally where you want … and the government of Israel will approve it for you retroactively.”