Israeli 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 the Israeli parliament rejected a bill to legalize settlement outposts.
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 AlQuds (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.
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 Israeli forces in the 1967 Middle East war. Palestinians say it should be part of their future state.
Hours after the legalisation of outposts was rejected, 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.