The decision, which followed hints by Ehud Olmert that he could set Israel's borders unilaterally should he win general elections on 28 March and should peace talks remain stalled, drew censure from Palestinians who consider the barrier a land grab.
Roughly half of the 600km (370 mile) network of fences and concrete barricades has been built, some on occupied land where Palestinians seek statehood. Several parts of the project have been held up by Palestinian appeals to Israel's Supreme Court.
Israel calls the barrier a bulwark against Palestinian bombers. A senior official said that Olmert, who assumed power after Ariel Sharon, the prime minister, suffered a stroke on 4 January, reiterated the incumbent's orders to step up construction.
An official said: "He made it very clear that the fence has to be completed as quickly as possible."
The prime minister's office said in a statement that Olmert recommended rerouting the barrier northeast of Jerusalem so as to enclose a Jewish settlement, Ramot, within the city limits while excluding the nearby Palestinian village of Bait Iksa.
Such moves have stoked Palestinian suspicions that Israel wants the barrier to cement a permanent hold on areas of the West Bank, which it occupied in the 1967 Middle East war.
Also captured in the conflict was Arab East Jerusalem, which Israel annexed as its capital in a move not recognised abroad.
In July 2004 the International Criminal Court of Justice ruled that the wall was illegal and Kofi Annan, the UN secretary-general, said Israel should abide by the ruling.
Palestinians want East Jerusalem as capital of a future state.
Saeb Erikat, the Palestinian negotiator, said Olmert, whom opinion polls predict will easily win election at the head of the centrist Kadima party, was jeopardising hopes of reviving efforts to end more than five years of fighting.
"This is very worrying," Erikat said. "We had hoped that Mr Olmert would pursue the path of negotiation rather than dictation."
Thousands of olive trees have
been destroyed by the wall
Olmert backed Israel's unilateral withdrawal from the Gaza Strip last year, a move Sharon said aimed to break a diplomatic deadlock and restart talks on a US-led road map to a peaceful Palestinian state in the coastal territory and the West Bank.
On Wednesday, in his first policy speech as interim prime minister, Olmert reaffirmed Israel's commitment to the road map but hinted that he could order more unilateral steps should the Palestinians fail to disarm militants as mandated by the plan.
"The most dramatic and important step we face is shaping the permanent borders of the state of Israel," Olmert said.
"We would prefer an agreement. If our expected partners in the negotiations in the framework of the road map do not uphold their commitments, we will preserve the Israeli interest at all costs."
Israel has not met its requirement under the road map to stop expanding Jewish settlements in the West Bank. Sharon said Israel would keep settlement blocs under a peace accord with the Palestinians, a plan endorsed by George Bush, the US president.
The legal consequences of the construction of a wall in the occupied Palestinian territory, advisory opinion - International Criminal Court of Justice