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Israel's cabinet has frozen plans to expand the occupied West Bank's most densely populated Palestinian city by ceding military control over a parcel of land.

The proposed concession to expand Qalqilya has outraged Israeli settler communities because it would effectively grant Palestinians more autonomy.

A spokesman from Prime Minister Binyamin Netanyahu's office said on Wednesday that the government will deliberate the issue of Palestinian development in military controlled areas of the West Bank later this month.

Until then, the proposal to grant a part of Area C to allow the expansion of the city of Qalqilya is on hold.

The plan would have allowed Qalqiliya to double its size by expanding into land that has until now been off-limits.

"We desperately need this plan because of the density," said Mayor Hashem al-Masri. 

"It will be a catastrophe if we can't expand. It will feel like someone is trying to drive us out of our city," Masri added.

Last year, Netanyahu's government quietly passed the eagerly awaited plan to allow the Palestinian city to double its size by expanding into off-limits land in Area C.

Since then, settler leaders have railed against the move, calling it a "reward for terror".

Qalqilya was once a regular shopping destination for Israelis. Palestinians would cross into Israel freely for jobs, and some locals stilll fondly recall leisurely riding their bikes to Israeli beaches on the Mediterranean.

But this all changed after a crackdown on Palestinians after the Second Intifada.

Qalqilya has been among the quietest cities in the West Bank, and has even been singled out by Israel's nationalist Defence Minister Avigdor Lieberman as a "model" city in the occupied territories.

Its planned expansion is one of the flagships of Lieberman's "carrot and stick" policies toward the Palestinians.

Qalqilya has been illegally occupied by Israel since the 1967 war.