FACTBOX - Israeli settlement policy

(Reuters) - Israeli settlement expansion in the West Bank is at the heart of a rift between Israeli Prime Minister Benjamin Netanyahu and U.S. President Barack Obama, who has sent an envoy back to the region to try to reach agreement.

Following are details about Israeli settlements.

WHO ARE THE SETTLERS?

Close to half a million Jews live on West Bank land captured by Israel in 1967, including Arab East Jerusalem. Some live in "outposts" not recognized by Israeli law but most are in more than 100 official settlements -- some with tens of thousands of residents -- under Israeli rule, including areas annexed to Jerusalem. Many, including some 200,000 living on occupied land that Israel says is part of Jerusalem, are motivated by cheaper housing costs. Others see themselves as pioneers exercising what they believe is a God-given right of Jews to lands they call Judea and Samaria. Israeli Defense Minister Ehud Barak has said he plans to dismantle some two dozen unauthorized "outposts" after consultations with settlement leaders.

IS IT LEGAL?

The World Court and European Union have deemed settlements as illegal under international law, including the Geneva Conventions. The United States, under President Jimmy Carter, also called the settlements illegal but subsequent administrations have used softer language, terming them unhelpful or obstacles to a peace agreement. Israel demurs but agreed in 2003, under the U.S.-sponsored "road map" to peace, to "freeze all settlement activity" including building in existing settlements, which Israeli governments refer to as "natural growth." It also agreed to dismantle outposts, some just trailers, set up since 2001. In 2005, it forced all 8,500 settlers to leave the Gaza Strip. Settlement in the West Bank has continued to expand at a rate higher than the population growth inside Israel, according to peace movements.

WHAT'S THE PROBLEM?

Palestinians, who number about 2.5 million in the West Bank and 1.5 million in Gaza, want the land that the settlers have claimed as part of a state and say settlements and the Israeli military protection they enjoy -- including the mammoth West Bank barrier being built -- disrupt their economy and threaten any prospect of real sovereignty. Palestinians fear settlements will isolate formerly Arab-ruled East Jerusalem, which Palestinians want as their capital, from the West Bank and also split the West Bank into northern and southern zones. Israeli Prime Minister Benjamin Netanyahu, who heads a right-leaning government, intends to continue the "natural growth" of existing settlements but will not build new ones, officials say.

WHY DOESN'T ISRAEL STOP SETTLEMENT?

Israeli coalition governments depend on pro-settler parties that speak for a significant part of Israel's 7 million people. Governments have also argued at times that they lack powers to prevent settlers building and accuse Palestinian leaders of not honoring their own road map pledges on halting violence.

HOW DOES IT FIT WITH NEGOTIATIONS?

Palestinians say they will not return to peace talks with Israel until it halts settlement expansion and Netanyahu endorses the establishment of a Palestinian state. Israel proposes drawing a border with the Palestinian state to place most settlers' homes inside Israel and giving the Palestinians land in return elsewhere. Palestinian leaders say land swaps may be possible. But the issue will be particularly sensitive in negotiating the future status of Jerusalem.

(Writing by Alastair Macdonald and Jeffrey Heller, editing by Philippa Fletcher)