Construction in the settlements can be stopped. The settlements are not in Israeli territory and the law allows the government to stop the construction for political or other reasons. The government even has the authority to evacuate settlements (as occurred in the Disengagement and was approved by the Supreme Court), so that naturally it is also within its authority to prevent continued construction. And there have been precedents.

In every development contract in the settlements there is an article stating it is subject to political decisions. For example:

Whereas in addition to the conditions of the following lease the following special terms will apply:
This contract does not detract from the power of the IDF commander in the area and/or the head of the Civil Administration in the area to apply his powers based on any law regarding this property.

Decisions by the Rabin government
In his election campaign, Rabin promised to change priorities. Rabin announced that stopping the settlements is an Israeli interest and his government decided (in cabinet decision 360 of November 22, 1992) not to allow any new construction in the settlements, not to allow plans to be promoted and to stop construction that had already begun (see decision below).

Exceptions committee
A list was made of all of the sites where construction would be stopped. A study was carried out by the ministries of finance and housing, reviewing all of the building starts, contracts with contractors and the stage at which the construction stood. On May 23, 1993 the government created a special exceptions committee (decision 1292) to review specific projects or plans. When stopping construction caused specific harm to a settlement or when the infrastructure or construction did not come out of state budgets, the committee could approve the construction on a case-by-case basis. The committee did not approve many new plans.

Local councils in settlements could submit requests to the committee comprising the director general of the housing and construction ministry, the accountant general from the treasury and the defense minister's adviser on settlements, who gave their recommendations to a special ministerial committee including the ministers of housing and finance to approve their recommendations.

Legislation
Based on the cabinet decision, the OC Central command issued an order prohibiting the advancement of any construction plans in the territories except for exceptional cases approved by the exceptions committee.

HCJ test
The settlers petitioned the High Court of Justice claiming the government did not have the authority to stop construction that already began or construction that had already been approved. In HCJ rulings 4400/92 and 572/93 - Kiryat Arba Local Council et al v Prime Minister Yitzhak Rabin et al, the court ruled that the government does have the authority to decide to stop construction in the settlements and rejected all of the petitioners' arguments.

Compensation
The contractors' organization appealed to the Jerusalem District Court claiming the state was not allowed to stop the construction. The court accepted the state's claim that it could rely on an article in the contract of every agreement on land and construction in the settlements, that says "This contract does not detract from the power of the IDF commander in the area and/or the head of the civil administration in the area to apply his powers based on any law regarding this property" and that the building could be stopped.
Following the court decision the Gabbay committee was formed, headed by former director general of the treasury Meir Gabbay, who looked into the contractors' requests for compensation. In most cases compensation was granted for the investment that had already been made and in some cases also for overhead expenses, but never for loss of future profits.

Private construction
While the decision by the Rabin government stopped all future planning, it left an opening for continued construction based on existing plans in cases when the construction was initiated privately without government involvement. If that precedent is accepted today it could open the door to building 40,000 housing units that have already been approved in the many plans for the settlements.

A summary of cabinet decision 360 from November 22, 1992
1. To approve the decision by the housing minister and the finance minister… to stop construction as detailed in the attached appendix A. and the ministers' decision to substitute location grants with loans as detailed in the attached appendix B.
2. To approve stopping construction activities in Israeli settlements in Judea, Samaria and Gaza, carried out on the basis of previous cabinet decisions on file in the cabinet secretariat, according to the aforementioned ministerial decision.
3. Private construction for housing will be allowed in existing Israeli settlements in Judea, Samaria and the Gaza Strip, on the basis of valid detailed outline plans, as long as the infrastructure and construction did not involve state budget expenditures.
4. (1) The procedures regarding outline plans that were not validated until this decision was handed down regarding Israeli settlements in Judea, Samaria and Gaza will stop unless the exceptions committee recommended otherwise.
5. Any new permits for planning (and allocating land for construction on state land) in those areas will require the approval of the aforementioned exceptions committee.
6. The aforementioned will be anchored respectively in the security legislation in the areas of Judea, Samaria and Gaza.
7. Enforcement of the aforementioned policy will be carried out by the inspection units.