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The deal will leave Palestinians more land near the largest Israeli settlement, Maale Adumim.
The decision came in response to complaints lodged by Palestinians with the Israeli High Court.
The Israeli government says it will move the barrier closer to the settlement to allow 400 hectares of Palestinian land to remain untouched.
Maale Adumim is built on land claimed by the Palestinians for a future state and, like all settlements, is considered illegal under international law - although Israel rejects this.
The Palestinians say the barrier violates their freedom of movement and robs them of their land, while Israel says it is needed to stop militant attacks.
Controversy
Israel began building the West Bank barrier in 2002.
It has been widely criticised internationally for looping into Palestinian areas around Israeli settlements, rather than following the Green Line, which marks the boundary that separates Israel from the West Bank.
The International Court of Justice ruled in 2004 that the barrier is illegal where it cuts into the West Bank and called for it to be pulled down.
Only two of five changes of route ordered previously by the High Court have been carried out by the Israeli government.
(BBC)
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