JERUSALEM, June 6 (Jeffrey Heller/Reuters) - Israel on Wednesday said it would build 851 new settler homes in the occupied West Bank hours after parliament rejected a bill that proposed legalizing all settler apartments on privately owned Palestinian land.

Palestinians fear that the settlements, built on land Israel captured in a 1967 war, will deny them a viable state, and have refused to return to peace talks frozen since 2010 until their expansion is halted.

Housing Minister Ariel Atias issued a statement announcing the building of 551 housing units in various settlements across the West Bank and Prime Minister Benjamin Netanyahu earlier said 300 apartments would be erected in the settlement of Beit El.

Atias said land was available for building in West Bank settlements, with 117 housing units set for Ariel, 92 in Maale Adumim, 144 in Adam, 114 in Efrat and 84 in Kiryat Arba.

Netanyahu won a parliamentary battle against an attempt by far-right lawmakers to legalize all Israeli settler homes on private Palestinian land in the occupied West Bank.

The right-wing leader had pledged to abide by a Supreme Court ruling and remove five settler apartment houses erected on disputed tracts in Beit El.

Pro-settler legislators tried to stay Netanyahu's hand with a bill that critics said would have challenged the rule of law in Israel by bypassing the Supreme Court and retroactively legalizing those homes and thousands of others like them.

But at Netanyahu's behest, the legislation was voted down by a vote of 69 to 22 in the Knesset, where Netanyahu's coalition controls 94 of 120 seats.

Hours before the vote, Netanyahu won approval from the attorney general for his plan to relocate the disputed dwellings, home to 30 families, to a military zone near Beit El. Settler leaders and their parliamentary backers, including members of Netanyahu's Likud party, opposed the proposal.

Under the plan, Netanyahu's promise to build 300 new homes in the West Bank was an apparent bid to appease settlers and their supporters - his traditional power base.

Netanyahu's announcement drew a reaction from U.S. State Department spokesman Mark Toner who said the United States was aware of the announcement to build 300 new homes.

We are very clear that continued Israeli settlement activity in the West Bank undermines peace efforts and contradicts Israeli commitments and obligations, Toner said.

The step also likely to anger Palestinians and draw international criticism.

The 30 families will remain in Beit El and 300 more families will join them, Netanyahu said in a televised statement after the vote. There is no government that supports or will support settlement more than the government I lead.

But he said Israel was a law-abiding democracy and the government had to respect the court's ruling.

The U.N. World Court considers the settlements illegal but Israel, citing historical and Biblical links to the territory, disputes this.

MINEFIELD

Netanyahu had been thrust into a political minefield by a Supreme Court ruling that determined the five apartment houses in Beit El had been built illegally on land under private Palestinian ownership and must be removed by July 1.

His plan to move the structures to the military zone in what could be a complicated engineering project was widely seen in Israel as a way for Netanyahu to avoid the damage that footage of demolished settler dwellings would cause to his image as a champion of settlement.

And while Netanyahu's political victory could leave a reservoir of resentment against him in the Likud and among the settler community, defying the Supreme Court - regarded by many Israelis as an important watchdog over the government - would have likely caused a public outcry.

This is a government of cowards, Aryeh Eldad, a legislator from the far-right National Union party, told reporters.

Netanyahu had threatened to fire any member of his government who voted in favor of the legislation, and his ultra-nationalist foreign minister, Avigdor Lieberman, decided at the last minute not to back the bills.

Several cabinet ministers who supported the legislation stayed away from the Knesset session and avoided the vote.

Facing down a clutch of Likud rebels, Netanyahu also had the support of the centrist Kadima party, the major partner in a coalition government - one of the biggest in Israel's history - that he formed last month.

Netanyahu cautioned against any rush by settlement opponents to the Supreme Court to mount further legal challenges.

Those who think they can use the court system to harm settlement are mistaken, because in practice, the exact opposite happens - instead of Beit El shrinking, it is being expanded, he said, referring to his plans to build more homes there. (Additional reporting by Ori Lewis, editing by Michael Roddy)