The three outposts over which the decision was made are Bruchin, Rechalim and Sansana.
Bruchin has nearly 400 residents and is located in the northern West Bank, along with Rechalim, which is home to about 200 people. Sansana, home to around 250 people, is in the southern West Bank, near Hebron.
Condemning the decision, Nabil Abu Rdainah, a spokesman for Mahmoud Abbas, the Palestinian president, said "Netanyahu has pushed things to a dead end yet again".
Palestinians are awaiting a formal response from Netanyahu to a letter they sent last week in which Abbas repeated his call for an end to all settlement activity.
'Hiding the true policy'
The Israeli government had committed to the Supreme Court that it would regulate the status of the outposts, and Netanyahu on Sunday formed a new four-man ministerial committee to seek legal solutions to the contested projects.
|An activist protests against illegal settlements near Ramallah in the occupied West Bank [Reuters]|
Hagit Ofran of Israeli settlement watchdog, Peace Now, slammed the government for establishing new settlements in what he said was a deceitful way.
"The Israeli government is proving its true policy, that instead of going to peace it is building new settlements," she told the AFP news agency.
"This is the first time since 1990 that the government of Israel decides on establishing new settlements, and the government's manoeuvre, of establishing a committee to establish the settlements, is a trick aimed at hiding the true policy from the public.
"All the years these outposts weren't legal, the state said they aren't for real, and now they suddenly are."
The Netanyahu government has also been trying to prevent the demolition of another illegal settlement, Ulpana, after a court found it was built on private Palestinian land.
The Israeli prime minister has informed the cabinet that he has asked Yehuda Weinstein, the attorney general, to find a solution that would legalise the outpost and prevent its demolition.
Israel considers settler outposts built without government approval to be illegal, but the international community views all settlements as illegal, whether approved by the government or not.