Israel's top court on Thursday upheld the government's legal right to build a barrier through occupied West Bank land, rejecting a World Court ruling that it violated international law and should be torn down.
But the nine Israeli Supreme Court justices also ordered the government to reroute part of the planned 600 km (370 mile) barrier to reduce hardship to Palestinians.
It was the court's first judgement on the legality of the barrier since the International Court of Justice at The Hague ruled in July 2004 that the barrier was illegal because it cut into territory captured in the 1967 Middle East war.
The unanimous ruling on Thursday drew renewed Palestinian condemnation of the barrier project, which remains a major source of tension following Israel's completion of its pullout from the Gaza Strip this week after 38 years of occupation.
Israel calls the structure a bulwark against suicide bombers. Palestinians say it is a land grab to deny them a viable state.
The network of fences and walls, now more than half completed, is seen as stark evidence of Prime Minister Ariel Sharon's strategy of keeping a permanent hold on areas of the West Bank much larger than the former Gaza settlements.
"It was unfortunate that the Israeli court rejected the decision by the highest international court on earth," said Palestinian chief negotiator Saeb Erekat.
But Israeli Vice Prime Minister Ehud Olmert told Israel Radio: "The importance is the court made it legal for a fence beyond the Green Line (boundary between Israel and the West Bank) and decided the World Court ruling is not binding."
The Supreme Court said the World Court's blanket declaration of the illegality of the barrier was flawed because it had failed to take into account Israel's security needs.
Israel has faced a campaign of Palestinian suicide bombings and other attacks during a five-year-old Palestinian uprising also marked by fierce army raids in Palestinian areas.
ORDER TO REROUTE BARRIER SEGMENT:
The Supreme Court told the government on Thursday to find a way to reroute a 13 km (8 mile) segment of the barrier already built near the northern West Bank settlement of Alfei Menashe, home to 5,500 settlers.
A petition had been filed with the court on behalf of residents of five Palestinian villages who had complained that they were being cut off from the rest of the West Bank.
"This ruling saves five villages from certain extinction," said Michael Sfard, an Israeli lawyer for the Palestinians.
The Defence Ministry said: "The ruling will be evaluated and the defence establishment will act to implement it ...".
Israel rerouted large barrier segments near Jerusalem last year under court order after Palestinians complained of land confiscation and being cut off from jobs, schools and hospitals.
The new path cuts into 8 percent of the West Bank, less than half of what was originally planned. About 245,000 settlers live in the West Bank, home to 2.4 million Palestinians.
In Thursday's decision, the court ruled that Israel had a right to build the barrier on occupied land but only where the army had established security reasons for its construction.
Days before the World Court's decision last year, the Israeli court had said Israel had the right to seize land and build the barrier for security reasons. But until Thursday, it had been silent on the ruling from The Hague.
Israel had already said it would not abide by the World Court judgement and has continued erecting the barrier, which hugs the Green Line in many places but snakes into occupied territory in others.
Israel had boycotted the World Court hearings, accusing the UN's highest tribunal of bias and saying it had no jurisdiction. The court also said in its ruling that Israel's settlements were illegal. Israel disputes this.