Israel has been forced to make concessions to its apartheid housing policy, which for the first time could see Palestinian residents of occupied East Jerusalem enter a lottery for buying rights to government housing.

Jewish citizens of Israel are the only group eligible to enter such lotteries, but a legal challenge by Palestinian residents of East Jerusalem's Beit Safafa neighbourhood could see them also enter the bidding race.

The challenge followed a highly controversial settlement project in the new adjacent neighbourhood of Givat Hamatos. Plans to build 1,250 Jewish only homes for illegal settlers were denounced by the UN as well as the EU. The territory lies beyond Israel's 1967 borders, where the state is currently advancing extensive building plans for Jews only.