The US has shifted its position on Israeli settlements in the occupied West Bank, no longer viewing them as inconsistent with international law.
US Secretary of State Mike Pompeo said the status of the West Bank was for Israelis and Palestinians to negotiate.
Israel welcomed the move - a reversal of the US stance under President Donald Trump's predecessor, Barack Obama.
Settlements are communities established by Israel on land occupied in the 1967 Middle East war.
They have long been a source of dispute between Israel and the international community, and the Palestinians.
"After carefully studying all sides of the legal debate," Mr Pompeo told reporters, "the United States has concluded that "the establishment of Israeli civilian settlements in the West Bank is not, per se, inconsistent with international law".
"Calling the establishment of civilian settlements inconsistent with international law hasn't worked. It hasn't advanced the cause of peace," he added.
Chief Palestinian negotiator Saeb Erekat said the US decision was a risk to "global stability, security, and peace" and said it threatened to replace international law with "the law of the jungle".
Israeli Prime Minister Benjamin Netanyahu said the policy shift "rights a historical wrong", and called on other countries to do the same.
The issue of Jewish settlements is one of the most contentious between Israel and the Palestinians.
About 600,000 Jews live in about 140 settlements built since Israel's occupation of the West Bank and East Jerusalem. The settlements are widely considered illegal under international law, though Israel has always disputed this.
The Palestinians have long called for the removal of all settlements, arguing that their presence on land they claim for a future independent Palestinian state makes it almost impossible to make such a state a reality.