"Mexico regrets the Israeli parliament's decision to approve a law that legalizes settlements built on private Palestinian land," the Foreign Ministry said in a statement.
"Mexico reiterates that expanding Israeli settlements in the West Bank and East Jerusalem represents a major obstacle to the peace process, which should find a comprehensive solution based on the existence of two states, Israel and Palestine," the statement said.
Mexico called on the Israeli lawmakers "to revert the decision and abide by the related United Nations resolutions, in particular Security Council resolution 2334."
Earlier on Monday, the Israeli parliament approved the so-called "Regulation Bill" that retroactively legalizes about 3,850 housing units in dozens of outposts built illegally on privately owned Palestinian lands.
Observers believe Israel has been emboldened by the apparent unconditional backing of the new U.S. president Donald Trump, who has even called for the U.S. embassy to Israel to be relocated from Tel Aviv to the disputable city of Jerusalem, a move that is expected to inflame tensions in the Middle East.