The practice allows for detainees to be held for long periods without being charged or appear in court, and is often used against Palestinians who Israel deems security threats.
Defence Minister Israel Katz said it was "inappropriate" for Israel to employ administrative detention against settlers who "face severe Palestinian terror threats and unjustified international sanctions".
But, according to settlement watchdog Peace Now, it is one of only few effective tools that Israeli authorities to prevent settler attacks against Palestinians, which have surged in the West Bank over the past year.
Katz said in a statement issued by his office that prosecution or "other preventive measures" would be used to deal with criminal acts in the West Bank.
B'Tselem, an Israeli rights group, said authorities use administrative detention "extensively and routinely" to hold thousands of Palestinians for lengthy periods of time.
The Palestinian Prisoners Club advocacy group told AFP in August that 3,432 Palestinians were held in administrative detention.
Israeli daily Haaretz reported on Friday that eight settlers were held under the same practice in November.
Yonatan Mizrahi, director of settlement watch for Peace Now, told AFP that although administrative detention was mostly used in the West Bank to detain Palestinians, it was one of the few effective tools for temporarily removing the threat of settler violence through detention.
"The cancellation of administrative detention orders for settlers alone is a cynical... move that whitewashes and normalises escalating Jewish terrorism under the cover of war," the group said in a statement, referring to a spike in settler attacks throughout the Israel-Hamas conflict over the past 13 months.
Western governments, including Israel's ally and military backer the United States, have recently imposed sanctions on Israeli settlers and settler organisations over ties to violence against Palestinians.
On Monday, US authorities announced sanctions against Amana, a movement that backs settlement development, and others who have "ties to violent actors in the West Bank".
"Amana is a key part of the Israeli extremist settlement movement and maintains ties to various persons previously sanctioned by the US government and its partners for perpetrating violence in the West Bank", the US Treasury said.
Excluding Israeli-annexed east Jerusalem, the West Bank -- which Israel has occupied since 1967 -- is home to three million Palestinians as well as about 490,000 Israelis living in settlements that are illegal under international law.
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