The cabinet had been expected to approve the proposal during its morning session, but put off the vote amid disagreements over which communities inside Israel should be included on the list.

Ehud Barak, the Defence Minister and Labour party leader, insisted that the coastal city of Ashkelon, a bastion of support for his centre-left party, be included, public radio reported.

The cabinet's vote also decided to create a commission that will decide within 30 days on whether to include Askhelon and other communities on the list, a government official said.

The new credits will benefit 110,000 settlers and can be used for vocational training programmes and other educational or cultural activities.

Thorny issue

The issue of Israeli settlements on land forcibly taken from Palestinians is one of the thorniest in the stalled Middle East peace talks.

The communities affected from the vote are mainly outside the large settlement blocs Israel wants to annex under any peace accord with the Palestinians.

Yuval Steinitz, the minister of finance, told public radio that the move was aimed at expressing support for settlements amid the moratorium.

"With this, we want to send a message [to the settlers] that we understand their difficulties and want to support them," Steinitz said.

The European Union on Friday expressed concern over the plan and said it would consult its partners in the Middle East Quartet over the move.

Carl Bildt, the Swedish foreign minister, whose country holds the EU's rotating presidency, said: "Coordination with the Quartet I think is called for in view of the serious nature of such a move."

He said: "If I understand it rightly, it is a rather serious step," he said. "If that is the decision that will be taken by the Israeli government, we will most certainly express our views on it."