Holiday homes rental giant Airbnb is being sued in a class action by a law firm in Jerusalem over its delisting of settlements in the occupied West Bank.
It accuses Airbnb of "grave and outrageous" discrimination for not applying the same standard in occupied areas in other parts of the world.
On Monday, Airbnb said it took the move because it viewed settlements as "core" to the Israeli-Palestinian conflict.
The step was hailed by Palestinians and denounced by Israel.
The lawsuit was filed on behalf of Maanit Rabinovich from the settlement of Kida, and, according to court papers, will seek compensation for other similarly affected holiday home-letters.
It accuses Airbnb of discriminating against Israelis because it continues to list holiday homes in places considered occupied in other geopolitical hotspots, such as Tibet and Northern Cyprus.
Israel's tourism minister has denounced the firm's action against Jewish settlements as "shameful", and said Israeli authorities would back legal challenges against it.
The move, which affects 200 listings, has been widely praised by Palestinians and their supporters.
Jewish settlements in territory occupied by Israel in the 1967 Middle East war are considered illegal under international law, though Israel disputes this.
The issue of settlements is one of the most contentious areas of dispute between Israel and the Palestinians.
More than 600,000 Jews live in about 140 settlements built since Israel's occupation of the West Bank, East Jerusalem and the Golan Heights in the 1967 Middle East war.
The Palestinians see them as a major obstacle to peace and a barrier to a hoped-for Palestinian state on land which they occupy.
Israel says such an argument is a pretext for avoiding direct peace talks, and that the fate of settlements should be negotiated in accordance with peace accords signed with the Palestinians in 1993.