"We strongly condemn Israeli Parliament's adoption of a law that gives approval to various settlements consisting of 4,000 units built on the private property of the Palestinians," the Turkish foreign ministry said in a statement.
The ministry said the "unacceptable" Israeli policy contradicted UN Security Council resolutions and was "destroying the basis for the two-state solution".
The new law will allow Israel to legally seize Palestinian private land on which Israelis built without knowing it was private property or because the state allowed them to do so.
Ankara's reaction comes as Tourism Minister Nabi Avci was due to meet with his Israeli counterpart in Tel Aviv -- in the first visit by a top government official from Turkey since the two countries last year patched up ties that were badly damaged over the 2010 raid of a Gaza-bound Turkish ship by Israeli commandoes.
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Following the raid, which killed 10 Turkish activists, the two countries pulled their envoys out from their respective capitals as relations fell to an all-time low.
The rift came to an end in June last year after long-running secret talks in third countries. Israel paid compensation, offered an apology and granted Turkey permission to send aid to Gaza through Israeli ports.