The decision, handed down by the High Court Monday, relates to an appeal by Palestinian residents of Beit Jala, who say the proposed route would separate them from their olive groves and divide the local Christian community.
The residents say that if the barrier is built through the Cremisan Valley, 58 families would lose their land and the Roman Catholic Salesian order's properties would be split, leaving a monastery on the Israeli side and a convent on the Palestinian side.
At a hearing last week, the Council for Peace and Security, a group of former high-ranking security officials, proposed an alternative route for the barrier which it said would save most of the villagers' land and better ensure Israel's security needs.
On Monday, the court ordered the defence ministry to explain in writing "why other alternatives to the route of the fence were not examined... And why an alternative route had not been adopted."
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The ministry has until April 10 to respond.
If the barrier is built along the route proposed by the ministry, the villagers and the Salesian order stand to lose 3000 dunams (300 hectares/741 acres) of land, 700 of which belong to the church.
But if it follows the route proposed by the Council for Peace and Security, no land will be seized, figures from St Yves Catholic rights group show.
"We definitely have new hope - the answer of the court is a good sign," said a statement from Zvi Avni, legal counsel for St Yves, which represents the convent and its school.
On Sunday, the court ordered Israel Railways and the defence ministry to look into the possibility of removing one of the two railway tracks that run near Battir to enable an alternative route, giving them until February 27 to respond.