As part of the larger economic plan for cutting local government costs, an Interior Ministry panel has recommended unifying the settlement of Kedar with the city of Ma'aleh Adumim.
Municipal responsibility for Kedar - including sewage disposal, garbage collection and water - would be transferred from the Gush Etzion Regional Council, located dozens of kilometers to the south, to Ma'aleh Adumim, which is only about a kilometer away.
The panel's recommendations need to be approved by Interior Minister Eli Yishai. Yishai's spokesman said the minister had not yet made a decision.
Peace Now said the decision was aimed at ensuring that Kedar would be included inside the security barrier.
"The plan for a separation fence around Ma'aleh Adumim is at the moment being debated in the Supreme Court," Peace Now said in a press release.
"The recommendation to join Kedar to Ma'aleh Adumim is clearly an attempt to influence the justices' decision regarding the route of the fence, so as to claim that it is unreasonable to construct a fence in the middle of one unified settlement, although in fact the situation on the ground is clearly two separate settlements," added Peace Now, which obtained the panel's recommendations and leaked them to the press Sunday.
Ma'aleh Adumim Mayor Benny Kashriel rejected Peace Now's claim.
"All previous governments have agreed that it [Kedar] should remain inside the fence," said Kashriel, in a telephone interview with The Jerusalem Post.
"These recommendations were made by a professional panel appointed a long time ago. As a result they are not political, rather solely professional recommendations."
Kashriel said that Kedar's residents already send their children to school in Ma'aleh Adumim and use the city's community center and frequent its shops and markets. But Kedar's residents pay municipal taxes to Gush Etzion.
"We were asked by Gush Etzion's Regional Council if we would be willing to provide Kedar with water, sewage and garbage collection and we answered in the affirmative."
Peace Now argued that unifying Kedar, with a population of about 800, with Ma'aleh Adumim, with a population of 33,000, had serious diplomatic ramifications.
"The plan to unify the two settlements includes the intention to construct in this area 6,000 new housing units, to house 25,000 new settlers," said Peace Now in its press release.
But Peace Now admitted that "the plan is a general plan, made by the Housing Ministry, which is not yet in the process of approval."
The Bush administration's road map calls on Israel to halt settlement activity in the West Bank, while requiring the Palestinians to dismantle terror groups.
Despite international criticism, Israel has pledged to continue building in east Jerusalem as well as in the major settlement blocs in Judea and Samaria, even as a construction freeze continues elsewhere in the territories.
The Bush administration supported Israeli plans to keep several major settlement blocs - including Ma'aleh Adumim - as part of any final peace treaty with the Palestinians.
Kashriel said in response that unifying Kedar would not result in the building of additional homes between the two settlements.
"I wish the merger did allow us to expand but it does not," he said.
Kashriel added that Army Radio, which was the first new outlet to report on the panel's recommendations, attempted to create a provocation.
"It is a shame that a state-run institution makes a provocation from nothing at all," said Kashriel, who added that he had written a letter of complaint about Army Radio to Defense Minister Ehud Barak.