The announcement came after a petition was filed by the Palestinian land owners in the Supreme Court, Xinhua reported citing the Ha'aretz daily.
Homesh, a 0.7 square km settlement, was established in 1980 on lands belonging to residents of the nearby Palestinian village of Burka.
The Israeli Defense Forces (IDF) took over the land for "military purposes".
In 2005, former prime minister Ariel Sharon executed a "disengagement" plan, in which Israel evacuated settlements in the Gaza Strip and the West Bank.
Homesh was among the settlements that were evicted, but the land remained in the hands of the military.
In 2011, several Palestinians from Burka petitioned to the Supreme Court, with help from Israeli human rights groups, requesting to overturn the IDF's seizure of the land and hand the land over to its original owners.
"It's sad that so many years had to pass until the state decided to uphold the law and return the robbed land to its owners," attorney Shlomo Zharia, who submitted the appeal on behalf of the Yesh Din advocacy group, told the daily.
Since 2010, Israel and the Palestinian Authority have been at a deadlock as far as the peace process is concerned.
--IANS (Posted on 20-05-2013)