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JERUSALEM (Reuters) -- Settlers signed an agreement with the Israeli government on Sunday to leave the biggest illegal outpost in the occupied West Bank and move to a nearby site after months of negotiations to avoid their forced removal.

But campaigners against settlements described the deal as a disgrace, as the families had been allowed to relocate to another already-established West Bank settlement a few kilometers away.

Despite publicly endorsing the notion of an independent Palestinian nation, successive Israeli governments have nurtured settlements on the very land that the Palestinians claim as theirs.

Over the past decade the government has spent at least 4 million shekels ($1.1 million) on establishing and maintaining the cluster of squat, prefab bungalows at Migron.

But in an unprecedented ruling in August 2011, Israel's Supreme Court told the government to evacuate Migron, 32 km east of Jerusalem, by March 31, 2012, saying the land belonged to Palestinians.

About 500,000 Israelis and 2.5 million Palestinians live in the West Bank and East Jerusalem, areas Israel captured from Jordan in the 1967 war that Palestinians want for a future state together with the Gaza Strip.

Palestinians say the settlements will deny them a viable state and demand a total freeze in settlement building before peace negotiations with Israel, frozen for over a year, can restart.

Migron is the largest of more than 100 outposts built without official Israeli government authorization in the West Bank that are home to almost 2,000 people.

"This agreement is intended to fulfill the Supreme Court ruling and to prevent unpleasant scenes that we have seen in other places where there was an eviction and demolition of houses ... The government has taken responsibility for a settlement that it erected," Migron settlers' spokesman Itai Hemo said.

A spokeswoman for the anti-settlement advocacy group Peace Now called the agreement "a disgrace".

"This agreement is no less than a disgrace. The government of Israel is actually saying 'We will not evict Migron, we will not do what the Supreme Court told us. And we will give in to any settlers' threat ... It sends a message that Israel (does not want) peace (and will) build more settlements," Peace Now's Hagit Ofran said.

The new site allocated to the settlers is on land that is not under private Palestinian ownership, Israeli officials said.

While the United Nations deems all settlements in the region to be illegal, Israel backs 120 official settlements, home to about 310,000 people.