Palestinian residents of the occupied East Jerusalem neighbourhood of Sheikh Jarrah facing forcible eviction from their homes have been offered a compromise deal with Jewish settlers by Israel’s supreme court, in an unexpected development in the high-profile case.

The session on Monday, which was supposed to reach a final decision on whether to accept an appeal from four Palestinian families over eviction orders in the decades-old legal battle, was instead met with a surprise entreaty from the judges for the two sides to accept a “practical solution”.

“What we are saying is, let’s move from the level of principles to the levels of practicality,” Justice Isaac Amit told the courtroom, where proceedings took place in Hebrew without translation into Arabic. “People must continue to live there and that’s the idea, to try to reach a practical arrangement.”

The proposed compromise would allow the 70 Palestinians to remain in their homes as tenants with “protected status” and safeguard them from eviction for “the coming years” while paying an annual fee of 1,500NIS (GBP335) to the Nahalat Shimon company, a settler organisation that lower courts have declared the rightful owners of the disputed properties.

The deal, which leaves the question of legal ownership unanswered, was not greeted with enthusiasm by either side, but both parties are expected to give a formal response in the next court session.

The trade-off, however, is ultimately likely to prove unacceptable to the Palestinians, as it would in effect mean agreeing that the land is not rightfully theirs. The stalemated session concluded with an order from the three justices that the Palestinians must submit a list of names of people eligible for protected tenant status within the next seven days.

“There are all kinds of feelings [in Sheikh Jarrah] right now,” Mohammed el-Kurd, a prominent writer and activist from the neighbourhood, said outside the courtroom before the hearing began.

“I am furious that my fate is in the hands of settlers, settler establishments, settler courts, settler laws … I don’t have any hope or faith [in this process].”

Monday’s unusual proceedings came after the original court decision date in May was postponed amid protests against the evictions. The demonstrations in Sheikh Jarrah spiralled into some of the worst violence across Jerusalem in years, and helped trigger a new 11-day war between Israel and Hamas which left 254 Palestinians and 13 people in Israel dead.

Several Israeli media outlets reported before Monday’s hearing that Israel’s new governing coalition was seeking to delay the decision on evictions in order to diffuse domestic tensions and appease Joe Biden’s administration. The new prime minister, Naftali Bennett, is expected to make his first state visit to Washington DC later in August.

The fight for Sheikh Jarrah, a predominantly Palestinian neighbourhood in occupied East Jerusalem bordering both the Old City and West Jerusalem, touches on three of the most important issues of the Israeli-Palestinian dispute: control of the holy city, the rights of Palestinians living in Israeli-occupied territory, and the Palestinian right to return.

Israeli settlers have moved into some of its properties, saying they were owned by Jews before the war of 1948 surrounding Israel’s creation. Israeli law allows Jews to reclaim property in East Jerusalem, a right denied to Palestinians who lost lands and homes in the same conflict in other parts of the city.

Sheikh Jarrah’s Palestinian residents say that the land had been guaranteed to their families by Jordan, which offered them the homes in exchange for giving up their refugee status. Documents presented to the court on Monday suggested Jordan was interrupted in registering the claims by the war of 1967, in which Israel seized the Old City, along with East Jerusalem and the West Bank.

Israeli authorities have repeatedly said that Sheikh Jarrah’s future is a private property dispute which should be resolved in court, rather than a matter for the state. Attorney general Avichai Mandelblit excused himself from the issue in June.

Rights groups say other families in East Jerusalem are also vulnerable to eviction orders, estimating that more than 1,000 Palestinians in total are at risk of losing their homes in similar court battles.