Israeli rights group Yesh Din said that the army had taken the decision to surrender control of the land after it petitioned the High Court late last year.
The decision, which spares the army a potentially lengthy court case, will see more than 170 hectares (420 acres) of what used to be valuable farmland restored to its original owners, Yesh Din said.
The land, which had been seized for military purposes in the 1970s and 1980s, had ceased to be used by the army.
Control of other tracts of land near the city of Ramallah will also be transferred.
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"These are lands that have been seized nearly 40 years ago," Yesh Din spokesman Gilad Grossman told AFP. "Palestinian farmers rely on their land.
"For them to be able to return to these lands, maybe they can improve their lives."
Grossman called on the army to give up other land that it had seized but was no longer using. "We shouldn't have to go to court every time," he said.
Jalud village council leader Abdullah Hamed welcomed the army's decision to surrender control but said villagers were still waiting for a second decision allowing them to actually return to their land.