A panel of Israeli cabinet ministers endorsed proposed legislation on Sunday to annex an area of the occupied West Bank likely to be the eastern border of a future Palestinian state.
The move, pushed by far-right members of Prime Minister Benjamin Netanyahu's Likud party, could weigh on troubled U.S.-brokered peace negotiations several days before another visit to the region by Secretary of State John Kerry.
But centrist Justice Minister Tzipi Livni, who also heads Israel's negotiations with the Palestinians, immediately challenged the motion, and said she would use her powers to block the legislation from being voted on in Parliament.
Peace talks have shown few signs of progress since Kerry oversaw their renewal in July after a three-year deadlock.
The target is to reach an agreement by April towards achieving a "two-state solution" in which Israel and a new Palestinian state would co-exist side by side.
The Jordan Valley region of the West Bank which Israel captured in a 1967 war and Palestinians seek as part of their future state, has been a focus of recent disagreement. Palestinians reject Israel's demand to maintain a security presence there.
Kerry said in Washington earlier this month that the need to resolve the dispute over the Jordan Valley was "a critical threading of a needle that has to happen in order to achieve an agreement". He said he was coordinating with Jordan as well.
The Israeli proposal to incorporate the Jordan Valley within its borders, endorsed by the cabinet's legislative committee, was the first Israeli step in years to annex any territory captured in 1967.
Shortly after that war, in a move not recognized internationally, Israel annexed East Jerusalem and added some adjoining West Bank land to the city, which it regards as its capital.
The last time Israel annexed any land captured in the 1967 war was in 1981 when it applied its law to Syria's Golan Heights, a strategic plateau that lies to the north.
The proposed legislation came up two days before Israel said it would free 26 Palestinian prisoners, the third of four groups of prisoners being released as an agreed confidence-building measure since peace negotiations resumed.
The prisoners had been jailed for deadly violence committed before a 1993 Israeli-Palestinian interim peace accord.
Also expected to weigh on Kerry's visit this week is an Israeli plan to build 1,400 homes in Jewish settlements, which Palestinian negotiator Saeb Erekat said would "destroy the peace process" and could be met with retaliation.