The bill must pass through three readings in parliament and also be ratified by the supreme court before it can become law.
Today's vote was rushed through the ministerial committee in an attempt to prevent the evacuation of the Jewish settlement of Amona in the Israeli-occupied West Bank by the end of the year.
The supreme court has ordered the evacuation of settlers from Amona and the demolition of their homes by December 25.
Amona is home to about 40 families and was built on land privately owned by Palestinians who had petitioned the court for the outpost to be removed.
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They are also seen as a major stumbling blocks to peace efforts as they are built on land the Palestinians see as part of their future state.
The controversial bill approved unanimously today stipulates that the government could order the confiscation of privately owned Palestinian land in exchange for compensation.
It was at the centre of a row between Prime Minister Benjamin Netanyahu who had sought to delay the vote and hardliners in his ruling right-wing Likud party.
The anti-settlement Peace Now movement denounced the vote.
"It is a shame: the government is backing a law that will allow the confiscation of privately owned Palestinian land in order to build settlements," said Hagit Ofran, one of the watchdog's leaders.
According to Ofran, around 2,000 homes have been built on land owned by Palestinians in the West Bank.
Attorney General Avichai Mandelblit warned the ministers that he would be unable to defend the bill before the supreme court.