The decision means the illegal barrier will engulf the whole city of Jerusalem and encompass Palestinian lands envisaged for a future state, including Arab east Jerusalem, the intended Palestinian capital.
The Israeli decision on the final route of the Jerusalem segment of the illegal barrier was made late on Sunday in a meeting of senior Cabinet ministers chaired by Sharon, said a senior Israeli government official who spoke on condition of anonymity.
The plan states almost 80% of West Bank Jewish settlements would be engulfed by the internationally condemned separation wall.
Eleven crossings would be built into the barrier to allow access from the West Bank, and construction is to be completed by the end of the year, the official said.
Palestinians say this decision will negatively affect an already fragile peace especially if Israel continues reneging on its agreements.
Palestinians say the wall is
absorbing some of their lands
Palestinian Negotiations Minister Saib Uraiqat said the approval of the Jerusalem segment of the internationally condemned separation barrier could destroy efforts to revive talks.
"This is a policy of dictation and not negotiation," Uraiqat said. "This prejudges and prejudices the outcome of permanent status negotiations."
The barrier will include a portion of the Palestinian town of Bethlehem, south of Jerusalem, to include what Israeli officials say is a Jewish shrine.
Israeli Vice Premier Ehud Olmert, who heads a ministerial committee on the Jerusalem barrier, did not refer directly to Sunday's meeting.
Olmert says the Jerusalem part
of the barrier has US backing
Asked by Israel Radio about the fate of the largest Jewish settlement in the West Bank, he said: "Does anyone have even the slightest doubt that Maaleh Adumim is an integral part of Israel
Olmert said he expected no opposition from the United States, pointing to assurances by President George Bush last year that any final Israeli-Palestinian peace deal would have to recognize what he called "demographic realities".
Israel understood that to mean that Bush supports Israel's plan to annex large Jewish settlements in the West Bank as part of any deal with the Palestinians.
Israel began building the illegal separation barrier in the West Bank two years ago. It is planned to cover a distance of 600km, of which 200km have already been completed.
Israel has cited security reasons for the building of the 8m-high, illegal separation wall.
An ICJ ruling says the barrier is
illegal and should be torn down
John Dugard, the South African law professor charged with monitoring the West Bank and Gaza Strip by the UN Commission on Human Rights, said:
"There is no compelling evidence that bombers could not have been as effectively prevented from entering Israel if the wall had been built along the Green Line – the accepted UN border between Israel and Palestine – or within the Israeli side of the Green Line."
Dugard dismissed Israel's alleged security reasons for the illegal barrier.
He highlighted that "rich agricultural land and water resources have been seized along the Green Line and incorporated into Israel".
Last summer, the General Assembly passed a resolution against the wall, and the International Court of Justice issued a non-binding ruling that the barrier is illegal and must be torn down.
Israel brushed off the resolution and rejected the courts decision.
The Palestinian refugee camp of Shuafat, which straddles the Jerusalem municipal boundary, will be encircled by a separate fence, with a crossing into the city to be controlled by Israeli occupation forces.
"This is a policy of dictation and not negotiation. This prejudges and prejudices the outcome of permanent status negotiations"
Palestinian Negotiations Minister
Many camp residents have Jerusalem identity cards.
The Israeli government official said the barrier largely follows Jerusalem's municipal boundaries.
Israel drew those boundaries after seizing east Jerusalem from Jordan in the 1967 Arab-Israeli war and declared the city Israel's "eternal capital".
Meanwhile, in the Gaza Strip, two Palestinian teens, aged 16 and 17, were shot and wounded by Israeli troops after they entered a no-go zone near the border fence with Israel. One of the teens was treated at a Palestinian hospital and the second arrested by Israeli occupation forces.