The High Court for Justice ruled Wednesday morning that the contested Draynoff homes in Beit El, in the Binyamin region north of Jerusalem, will be torn down.
The demolition must be carried out by Thursday at midnight.
The court rejected the motion for a temporary order preventing the demolition.
Beit El Mayor Shai Alon said in response: “It's a difficult day. The decision makes no sense.”
Residents of Beit El were calling for nationalist MKs to collapse the coalition on Tuesday, after security forces stormed the Draynoff compound in the town ahead of demolition despite the nearly completed legalization process for the buildings.
Judy Simon, a 15-year resident of the town and also its tourism coordinator, told Arutz Sheva on Tuesday that the two "buildings have been through the entire process of all the proper channels for them to be legalized."
"Last week we got our final permission from the (IDF) Civil Administration, and then today we were supposed to go to the Supreme Court in order to requestthat the discussion be reopened and that the demolition orders be cancelled."
But on Monday night, security forces came "like thieves in the night," even while fully "knowing that everything was upright and proper, moments before we were able to put in our request," said Simon.
"If the Draynoff buildings in Beit El had to fall, then the government should fall," demanded the irate resident.
It remains unclear as to whether Jewish Home would be willing to make such a move; while MK Moti Yogev of the party hinted the Beit El incident may end the coalition, party chairman Naftali Bennett has so far been focused on criticizing his coalition partner Likud and calling for it to take action.
There has been tension growing in the party, with supporters from Beit El facing off against Bennett to press him to do something about the demolition, to which he told them to protest Likud. The Tekuma faction of Jewish Home has indicated it may take action if the party does not.
For its part, Likud's Defense Minister Moshe Ya'alon initially denied giving the order to seize the buildings, while Prime Minister Binyamin Netanyahu has said he opposes the demolition, calling on the Supreme Court to cancel the demolition orders in light of the Civil Administration building permission which has led to a last-minute petition.