A compromise reached between Prime Minister Ariel Sharon and hardline ministers allowed the cabinet on Sunday to support a US-backed strategy to "disengage" from Gaza.
But none of the 21 illegal colonies in Gaza will be dismantled any time soon.
Aljazeera's correspondent in Jerusalem, Walid al-Umari, said the new plan means that the Israeli PM does not even have to discuss Israeli towns built on occupied land until March 2005.
"This 'compromise' is primarily meant to satisfy the US president that assurances between him and Sharon are not being broken," al-Umari said.
Ministers voted 14-7 for a proposal envisaging removal of all 21 settlements in the Gaza Strip and four of 120 in the West Bank in four stages to be completed by the end of 2005, political sources said.
The Revised Disengagement Plan also declared Israel's intention to maintain a permanent hold on swathes of occupied West Bank land where the bulk of its 240,000 settlers live.
Sharon said the cabinet's plan showed that Israel was "taking its future in its own hands".
"This 'compromise' is primarily meant to satisfy the US president that assurances between him and Sharon are not being broken"
"The disengagement is getting under way," he told an American Jewish youth group in Jerusalem.
"The government decided today that by the end of 2005 Israel will leave Gaza and four settlements [in the West Bank]."
Within hours of the cabinet vote, an Israeli soldier shot dead a a man in a wheelchair.
Arafat Yakub was shot in the head when occupation forces opened fired on stone-throwing demonstrators near a checkpoint at Qalandiya refugee camp, north of Jerusalem.
The 31-year-old paraplegic had been shot twice before in previous confrontations with Israeli troops - the first time in 1989, after which he suffered paralysis.
He had also been shot in a demonstration in 2002. The father of three was an accomplished wheelchair basketball player and directed a rehabilitation centre at the refugee camp.