The prospect of Israel becoming an officially Jewish state has returned to the nation's agenda, in what Palestinians have described as an obstacle to peace.

A 2011 bill that declared that 'State of Israel is the national home of the Jewish people', was approved by the government cabinet in a revised form on Sunday.

The bill's author, Avi Dichter, a member of Prime Minister Benjamin Netanyahu's right-wing Likud party, shared the news on Facebook.

The bill still faces drafting by Israel's Justice Ministry and several parliamentary votes before it could become law.

Dichter called the legislation 'an important step in entrenching our identity, not only in consciousness of the world but primarily in our own minds'.

The move may help Netanyahu bolster support with more right-wing members of his administration, and complements his ambition to have Palestinians recognise Israel as the 'nation-state' of the Jewish people.

Arab legislator Ayman Odeh responded to the cabinet decision on Twitter: 'The nation-state law is tyranny by the majority and "legally" turns us into second-class citizens.'

Palestinian President Mahmoud Abbas has said that such 'nation-state' legislation puts 'obstacles in the way of peace'. Other critics have said that the move could impede Palestinian refugees who have fled wars in the region from returning. Israel's arab minority currently makes up about 20 per cent of its population.

US president Donald Trump is scheduled to meet both Netanyahu and Abbas in his upcoming state visit to Israel, in an attempt to broker peace. 

Additional reporting by Reuters