The Israeli Defense Ministry's Civil Administration (CA) on Wednesday approved plans for 500 new homes in a major West Bank settlement, Shilo, and retroactively legalized another 200 in a nearby outpost, officials told Xinhua.

A ministry official defended the decision, saying that all of the areas in question were within what Israel considers state lands.

"There is nothing on private (Palestinian) land," he told Xinhua, adding that "the High Court of Justice demanded the ministry -- via the CA -- 'clear up the situation' and sort out the status of the housing units that were already there."

Shilo, which lies some 30 km south of Nablus, was founded in 1978 and has over 2,000 residents. It is part of a bloc of 10 other Jewish villages that straddle the strategic north-south Highway 60, which is also dotted with a patchwork of Palestinian towns and farmlands.

Shilo was mentioned in the Bible, and Israeli archaeologists and biblical scholars consider the hilltop area the site of the temporary capital of Israel before the first temple was built in Jerusalem, a contention residents use to buttress claims of original ownership.

However, the plans provoked an angry reaction from the Palestinian authority, which said the aim was to destroy any chance of a two-state solution to the decades-long conflict.

"These decisions are designed primarily to attack and destroy the option of the two-state solution," Palestinian negotiator Saeb Erakat said.

Peace Now Director Yariv Oppenheimer immediately slammed the decision in comments to Army Radio.

"What started out as an outpost of 30 units becomes a huge settlement of thousands of new settlers," he said, adding that such a move "... is not the path to two states; that is the path to a bi-national state."

Yisrael Medad, a foreign media spokesman for the umbrella Yesha council of settlements, in response to Oppenheimer's remarks, told Xinhua that, "We don't mind the 'one state' solution as long as it is Israel, which is a country that is democratic, that guards human rights and civil liberties."

Yonatan Becker, a 17-year resident and American immigrant from West Virginia, told Xinhua that, "There should be more places for Jews; there's definitely a housing shortage here and it can only be a good thing to have more houses," noting that he was aware of many potential residents awaiting vacancies.

"Shilo has been developing for the past ten years, and now is becoming a major center between Ramallah and Shechem (Nablus)," Medad said, adding that "I've been in Shilo for 30 years and have seen plans which reach thousands of units on paper."

He added, however, that he believed that "the (CA) numbers are wildly inaccurate. In Shilo itself, we're talking about 100-120 units. Some have already been built, but most have not."

Last week, the government also green-lighted a 5-million-shekel (about 1.34 million U.S. dollars) project to construct a two-story tourist center at Tel Shilo -- the community's ancient ruins -- that would include a rotating observation tower, according to Medad.

The ministerial committee in charge of the decision said "Tel Shilo is a unique heritage asset," adding that private donors would add another 10 million shekel in funding, according to Ha' aretz.

Palestinian sources disclosed Sunday that Palestinian President Mahmoud Abbas would send a stern message to Israel with key demands to save the stalled peace process between the two sides. One of the demands is that Israel stop all kinds of Jewish settlement construction in the West Bank and East Jerusalem, the part of the city that the Palestinians want as a future capital.