Israeli Prime Minister Benjamin Netanyahu on Wednesday defended a contentious new law targeting local boycotts of West Bank settlements, as the issue escalated into a battle over the limits of Israeli democracy.

Supporters say the law is needed to counter what they consider "delegitimization" of Israel's very existence. Critics say it is a violation of the basic right of free speech and part of a chilling trend by the government to stifle dissent.

The law, approved Monday, allows settlers or settlement-based businesses to sue Israelis who promote settlement boycotts. Courts would determine whether a boycott caused financial harm and if so, assess damages. Settlement-based companies produce items like wines and cheeses, and businesses operate factories, schools, supermarkets and bank branches in the West Bank.

Netanyahu and most senior Cabinet ministers were absent during Monday's vote, raising speculation that he had misgivings about the legislation. During a heated parliamentary debate Wednesday, Netanyahu made clear he supported the measure.

"I approved the law. If I hadn't approved, it wouldn't have gotten here and it wouldn't have passed," Netanyahu said. "I am against boycotts aimed at the state of Israel in general, and I am against boycotts aimed at groups within Israel."

The concept of boycotts is extremely emotional in Israel, going back to a long-standing boycott by the Arab world that led major international companies to avoid doing business there.

More recently, pro-Palestinian activists around the world have called for boycotting items produced not only in Jewish settlements, but in Israel as well. Israel says such efforts are attacks on the country's right to exist.

The legislation has also touched on Israel's highly divisive settlement enterprise in the West Bank.

About 500,000 Israelis live on war-won land claimed by the Palestinians for their state, including 300,000 in the West Bank and the rest in Israel-annexed east Jerusalem.

Israel's settlement policy is at the heart of the current impasse in peace talks, which broke down 10 months ago with the end of an Israeli slowdown on construction. The international community overwhelmingly condemns the settlements, and the Palestinians demand a new construction freeze as a condition for resuming negotiations, arguing that expanding settlements eat away at land they claim for their state. Israel says the settlement issue should be on the negotiating table and not a precondition for talks.

With settlements expanding, dovish Israeli groups and international critics have increasingly turned to the idea of boycotting settlement goods, hoping that financial pressure might succeed where diplomacy has failed.

On Wednesday, an Israeli peace group petitioned the Supreme Court to overturn the new law.

The Gush Shalom group said the law aims "to silence any criticism of government policy in general and of government policy in the occupied territories in particular."

The measure has also generated international criticism. The Anti-Defamation League, a pro-Israel Jewish group, urged Israel to rescind the law. Britain's ambassador, Matthew Gould, said the law "infringes upon legitimate freedom of expression and runs counter to Israel's strong tradition of free and vigorous political debate."

In Washington, State Department spokesman Mark Toner noted that freedom of expression is a "basic right."

The parliament's legal adviser and Netanyahu's own attorney general have also expressed misgivings.

Danny Danon, a member of Netanyahu's Likud Party and co-sponsor of the law, said the criticism is misguided. He said the law did not prevent anyone from speaking out against the settlements, but only provided a way for people who suffer financial losses to seek restitution.

"It's symbolic ... sending a message to those who are initiating boycotts," he said. He acknowledged it would be difficult to enforce the legislation and prove financial losses.

Two other Likud members, including coalition chairman Zeev Elkin, went further, saying they were drafting legislation that would allow parliament to veto Supreme Court appointments, currently approved by an independent commission.

"A radical left wing agenda has taken over the Supreme Court that doesn't represent the majority of the people," Yariv Levin, the co-sponsor of the initiative, told Israel TV.

In his speech, Netanyahu vowed to defend the Supreme Court, an institution known for its independence. Nonetheless, Dan Arbel, a former director of Israel's courts system, called the proposal a "very dangerous" threat.

Hard-liners are also pursuing legislation that would allow the government to investigate funding sources of advocacy groups that criticize Israeli policies.