They also sharply criticised a separate bill that would limit the volume of calls to prayers at mosques in Israel and Jerusalem, a measure government watchdogs have called a threat to freedom of religion and a provocation.
A committee of Israeli ministers adopted the two bills on yesterday, though they must still be approved by parliament.
The settler bill had been pushed forward by Education Minister Naftali Bennett of the hardline Jewish Home party.
"The recent Israeli measures are going to lead to catastrophe in the region," said Nabil Abu Rudeina, spokesman for Palestinian president Mahmud Abbas.
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"The Palestinian leadership will turn to the UN Security Council and all other international organisations to stop those Israeli measures."
Palestinian foreign minister Riad al-Malki accused the Israeli government of seeking to "impose facts on the ground and create new realities by legalising the illegal actions that it commits".
UN Middle East envoy Nickolay Mladenov said that the settlements bill and other such issues were "further pouring oil onto the fire."
It was drafted in response to a court order requiring the Israeli outpost of Amona, which includes about 40 families, to be evacuated by December 25 because it was built on private Palestinian land.
Today, the Israeli high court rejected a government bid to delay the evacuation by seven months.
Netanyahu had feared the bill could jeopardise the government's case.