On Sunday, members of Israeli Prime Minister Benjamin Netanyahu's cabinet approved the motion.
The move to retroactively authorise the outpost will grant it the necessary building permits and access to the state's budget.
"Today, the government will provide for the status of Havat Gilad in order to facilitate orderly life there," Netanyahu said, in reference to the deadly shooting that took place outside the outpost near the occupied West Bank city of Nablus.
Raziel Shevah, 35, was shot dead from a passing vehicle as he drove near his home in the unauthorised settlement last month.
The anti-settlement group Peace Now called the effort to legalise the outpost a "cynical exploitation of the murder".
Since last month's incident, the Israeli army has carried out a number of raids in Palestinian villages near the city, as it searches for Ahmad Jarrar, a 22-year-old Palestinian who is wanted for his alleged role in the killing.
His cousin of the same name was killed on January 18 after a 10-hour military operation, in what Palestinians believe was a case of mistaken identity.
Bulldozers and drones usually accompany the army during such incursions. Israeli forces have also laid siege to several houses in the village of Wadi Burqin in Jenin, which was last raided on Saturday.
The confrontation resulted in the death of a 19-year-old Palestinian man.
Israeli forces declared Jenin a closed military zone and imposed a curfew on several neighbourhoods.
While most of Israel's settlements in occupied East Jerusalem and the West Bank are built with the government's permission, outposts are constructed without authorisation and are theoretically illegal under Israeli law, but still receive governmental support and financial assistance.
Both settlements and outposts are considered illegal under international law.
With the signing of the Oslo Accords, settlement building was meant to end, but Israel has continued to expand existing settlements on Palestinian land.
Last year, for the first time in 25 years, the government approved the construction of an entirely new settlement in the West Bank.
Today, between 600,000 and 750,000 Israelis live in illegal settlements.