The phrase is used all the time, even by the UN.
And it is not true - even if you believe that Israel is occupying territory and that it is not "disputed."
International law recognizes occupation as a descriptive state. Sometimes it is called "belligerent occupation." But by definition, any occupation is by default legal. The acts that an occupying power perform can be illegal under Geneva, but the legality of the occupation itself is not addressed in either the Geneva Conventions or the 1907 Hague Conventions, the only two sources of international law for occupation.
There is only one way that an occupation can be considered "illegal," which is if the UN Security Council declares it as such under a Chapter VII resolution. That has never happened with Israel.
The ICJ ruling saying that the security fence Israel was building is illegal, which Israel haters point to as proof of their claims, indeed says that the territories are occupied (they claim that for territory to be occupied it does not have to belong to a High Contracting Party, in opposition to Geneva) but nowhere does it say that the territories are illegally occupied.
So any time someone says that Israel is "illegally occupying" territory, you can be certain that they are lying. A valid legal argument can be made that Israel is legally occupying territory - even though many prominent legal experts disagree with even that - but there is no valid legal argument whatsoever that Israel is illegally occupying territory.
(See also here.)
UPDATE: Sometime contributor Zach points to The international law of occupation By Eyāl Benveniśtî, which gives two examples of illegal occupation:
