The Israeli cabinet decided on Sunday to stop all forms of support, both direct and indirect, for Jewish settlements in the West Bank that have not been authorized by the state.
The decision came after a government discussion on a rising number of incidents of settler violence towards Palestinians and Israeli security forces in the West Bank, dpa reports.
The move bans all financial and infrastructure support to illegal outposts established near settlements Israel does recognize and support.
"The overwhelming majority of residents in Judea and Samaria live there legally," Prime Minister Ehud Olmert told his ministers at the weekly meeting.
He said there is "a not small group of wild people who behave in a way that threatens proper law and governance."
Settlers living in outposts are generally seen as more radical than those who live in the state-sanctioned settlements.
A recent evacuation of an outpost near Hebron led to injuries among the Israeli soldiers who removed the settlers and during the ongoing olive harvest season Palestinians have been attacked by masked settlers.
Some settlers have also called for revenge against the Israeli soldiers who evacuated them.
The cabinet decision also calls for further enforcing the rule of law against settlers in the West Bank both in regards to acts of violence as well as attempts to set up new outposts and built without permits.
The United Nations has deemed all Israeli settlements in the West Bank and East Jerusalem to be illegal, a stand Israel opposes.
The Israeli Peace Now movement says on its Website there are over 260,000 Israeli settlers in 121 state recognized settlements in the West Bank and reported on an additional 100 outposts in the West Bank.
Another 200,000 settlers live in East Jerusalem, according to estimates.