Israel's intelligence minister proposed on Monday to annex five settlements into the Jerusalem municipality, while also removing around 100,000 Palestinians from the city's census.
Yisrael Katz said residents of the settlements in the Israeli-occupied West Bank would be able to vote in Jerusalem municipal elections but the settlements would not be under full Israeli sovereignty.
For most of the world, the status of Jerusalem is still to be negotiated between Israelis and Palestinians, though the Israeli government considers the city its undivided capital.
Some of the settlements are deep in the West Bank, more than 10 kilometres (six miles) from Jerusalem.
"Those settlements, those towns -- Maale Adumim, Gush Etzion, Givat Zeev, Beitar Illit and Efrat -- will become part of Jerusalem but without changing their status -- without putting the Israeli sovereignty on those places," Katz told reporters.
Simultaneously around 100,000 people living in Palestinian neighbourhoods outside the Israeli wall surrounding the city would be removed from the city's census, with a new municipality built for them, Katz said.
The move would make Jerusalem's official demographic balance significantly more Jewish.
All settlements in the occupied West Bank are considered illegal under international law, as is formal annexation of land seized during war.
Most Israeli politicians think the largest settlement blocks in the West Bank will become part of Israel in any future peace deal.
"I am a hawk, but a clever hawk, a humanitarian hawk," Katz, a member of Prime Minister Benjamin Netanyahu's rightwing Likud party, said.
He said the bill would be discussed this week by the cabinet, but did not as yet have the full support of Netanyahu.
The far-right Jewish Home party has proposed unilaterally annexing Maale Adumim on the outskirts of Jerusalem into Israel, a move that would draw firm condemnation from the international community.