Gush Shalom, an Israeli peace group, wrote to the airline on Tuesday after two BA billboards were spotted at the entrance to the Ariel settlement.
The advertisements bore mock London road signs of famous landmarks such as Buckingham Palace and offered cheap flights to the British capital.
Adam Keller, spokesman for Gush Shalom, informed British Airways that "Ariel is, according to international law, an illegal settlement created on occupied Palestinian territory in contravention of the fourth Geneva Convention... which forbids an occupying power to settle its citizens in occupied territory".
Keller has said the existence of the Ariel settlement is the reason why Israel's Apartheid Wall penetrates so deep into Palestinian territory.
"Ariel is, according to international law, an illegal settlement created on occupied Palestinian territory in contravention of the fourth Geneva Convention... which forbids an occupying power to settle its citizens in occupied territory"
The wall, which the Israelis say they are building to protect their citizens from human bombings, surrounds the settlement in order to protect it.
Keller added most Israelis wanted to abandon settlements because they were endangering the country's chance of reaching a peace deal with the Palestinians.
"The placing of the billboards at Ariel could be taken... as an endorsement by your company of a phenomenon which, to say the least, does not deserve endorsement," Keller wrote.
"(The advertising) may alienate a large number of potential customers worldwide. It might, therefore, be advisable for your company to order the removal of the said billboards."
British Airways is investigating the accusations, but told Aljazeera.net it was not taking Israel's side against the Palestinians.
Spokesman Paul Parry said: "Nothing British Airways does in its business practices is designed to cause offence to any person or group. As an international airline we have no place taking sides in any dispute and always seek to remain impartial.
Settlements have been described
as ''armed fortresses''
"We are looking at the location of the site and if it is in Ariel itself it was never our intention to breach our code on impartiality. Equally we apologise for any offence... it caused."
Parry added BA would be talking to the agency managing the placement of its advertising in Israel to examine the reasons behind their choice of location.
The existence of Israeli settlements in the West Bank and Gaza is one of the major stumbling blocks preventing a peace deal between Israel and the Palestinians.
The overall number of settlers in the occupied territories now stands at 236,000, Israel's interior ministry announced recently.
The figure excludes East Jerusalem, illegally annexed to Israel in 1967, and now home to another 200,000 settlers.
The settlements, which religious Jews justify as being built on land "God gave the Jews", have been described as armed fortresses by critics.
"Nothing British Airways does in its business practices is designed to cause offence to any person or group. As an international airline we have no place taking sides in any dispute and always seek to remain impartial"
Under the terms of the US-backed road map peace plan, Israel is obliged to freeze settlement activity.
Nevertheless, the Israeli government has continued to issue tenders for the building of more apartments in the West Bank and Gaza.
Palestinians and human rights groups believe the settlement policy, promoted by both Labour and Likud parties over the past 30 years, aims to expand the boundaries of Israel.
However, according to international law, all Israeli settlements are illegal.