The Israeli justice ministry has recommended that the government should consider applying the Fourth Geneva Convention to the West Bank and Gaza.
Israel does not think Gaza and the West Bank are occupied territories
The convention covers the treatment of civilians in occupied territory.
The proposal comes from a team set up by Attorney General Menachem Mazuz to study the ramifications of a ruling by the World Court last month.
The International Court of Justice (ICJ) issued an advisory ruling that the West Bank barrier is illegal.
The court also accepted that the Geneva Convention does apply to the West Bank and Gaza and that the barrier breached the convention. This has been the general position of the international community, as affirmed in repeated United Nations Security Council resolutions.
Until now, Israel's position has been that the Geneva Convention does not apply to the territories it occupied in 1967 because there was no sovereign power there before their capture.
Before the Six Day War of 1967, Gaza was under Egyptian military control while the West Bank was annexed by Jordan, a move not widely recognised.
In particular, Israel rejects the argument that its settlements in the West Bank and Gaza violate the convention, which prohibits the transfer of civilians into occupied territory.
In the first political reaction to the recommendation Yuval Steinitz, the chairman of the Knesset's foreign affairs and defence committee and a member of the ruling Likud party, criticised the proposal and questioned the attorney general's competence to make it.
"Mazuz is in no position to measure the international and security consequences of his recommendations.
"This should not be determined by a legal perspective as Israel has to take into consideration a number of other criteria," Mr Steinitz said.
Michael Tarazi, a legal adviser to the Palestinian Authority, welcomed the Israeli attorney general's recommendation as a "positive development".
"It's about time Israel joined the international community in recognising that the West Bank and Gaza are occupied territories.
"However, I don't expect it to go much further than a recommendation. After 37 years of a belligerent occupation, I don't expect someone like Ariel Sharon to perform an about turn.
"For one, Israel would have to stop building settlements, and we can see that they are expanding them," Mr Tarazi told BBC News Online.