Israeli MPs on Wednesday voted down the preliminary reading of a draft bill that would have retroactively legalised settler unites built on private Palestinian land.
The 22-69 vote effectively thwarted an attempt to circumvent a Supreme Court ruling ordering the removal of five units from a settlement outpost known as the Ulpana neighbourhood by 1 July.
The planned demolition, which would affect 142 people, has sparked fury among settlers and their supporters in parliament, with right-wing MPs set to bring the two bills for debate and a vote in a Knesset session scheduled for the late morning.
Netanyahu strongly opposes the bills on the grounds they would create an international backlash, and has reportedly threatened to sack any cabinet minister or deputy who backs the proposed legislation.
Despite a commanding majority of 94 within the 120-seat coalition, Netanyahu had struggled to rein in the far-right members of his ruling right-wing Likud party, many of whom have said they will back the move to legalise the Ulpana homes.