A transport ministry spokesman said on Friday that Israel is considering building a rail link to the settlement of Ariel, which lies deep inside the occupied West Bank.
The spokesman stressed that it was only one of a number of projects under consideration but the right-wing Maariv daily said three million shekels (800,000 dollars) had been allocated for a feasibility study.
The proposed rail line would link the town of Rosh Ha Ayin, east of Tel Aviv, with Ariel and also serve Barkan, another settlement.
The idea was first proposed a few months ago by Transport Minister Israel Katz of the right-wing Likud party of hawkish Prime Minister Benjamin Netanyahu.
"No operational decision has been taken at this stage," the ministry spokesman told AFP. "It's just one among a number of proposals."
Although Ariel lies 17 kilometres (11 miles) from the 1967 border between Israel and the West Bank, and cuts a deep indentation into the territory, successive Israeli prime ministers have insisted on keeping the settlement in any peace deal with the Palestinians.
With a population of 18,000 it is one of the largest Israeli settlements in the West Bank.
Israeli settlement watchdog Peace Now reported earlier this month that a private developer was poised to begin work on 800 new homes in Ariel, despite US pressure for a freeze on new settlement construction to rescue moribund peace talks with the Palestinians.
The Palestinians see the settlements as a major threat to the establishment of a viable state, and they view the freezing of settlement activity as a crucial test of Israel's intentions.
Peace Now spokeswoman Hagit Ofran said the proposed new neighbourhood in Ariel would encircle the Palestinian town of Salfit just to the south and described it as a "grave provocation."
"There is no demand for housing now in Ariel," she said.