The US has said it no longer views Israeli settlements in the occupied West Bank 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.
The move is a reversal of four decades of American policy.
Mr Pompeo said legal questions about settlements should be resolved by Israeli courts and that declaring them a violation of international law distracts from larger efforts to negotiate a peace deal.
"Calling the establishment of civilian settlements inconsistent with international law has not advanced the cause of peace," Mr Pompeo said on Monday.
"The hard truth is that there will never be a judicial resolution to the conflict, and arguments about who is right and who is wrong as a matter of international law will not bring peace."
The change reflects the administration's embrace of an Israeli view at the expense of the Palestinian quest for statehood.
Similar actions have included President Donald Trump's decision to recognise Jerusalem as Israel's capital, the movement of the US Embassy to that city and the closure of the Palestinian diplomatic office in Washington.
"The US administration has lost its credibility to play any future role in the peace process," said Nabil Abu Rdeneh, a spokesman for Palestinian President Mahmoud Abbas.
The European Union warned of the potential repercussions in a statement following the announcement that did not mention the US.
"All settlement activity is illegal under international law and it erodes the viability of the two-state solution and the prospects for a lasting peace," said the statement from the bloc.
"The EU calls on Israel to end all settlement activity, in line with its obligations as an occupying power."
Even though the decision is largely symbolic, it could give a boost to Israeli Prime Minister Benjamin Netanyahu, who is fighting for his political survival after failing to form a coalition government following recent elections.
It could also spell further trouble for the administration's peace plan, which is unlikely to gather much international support by endorsing a position contrary to the global consensus.
