Foreign Secretary William Hague said he was "extremely concerned" by the move, which came in response to a historic UN vote to recognise Palestine as a non-member observer state.

"The UK strongly advises the Israeli government to reverse this decision," Hague said in a statement.

"The window for a two-state solution is closing, and we need urgent efforts by the parties and by the international community to achieve a return to negotiations, not actions which will make that harder."

He added: "If implemented, these plans (for new settlements) would alter the situation on the ground on a scale that makes the two-state solution, with Jerusalem as a shared capital, increasingly difficult to achieve."

Britain abstained from Thursday's UN General Assembly vote, saying that it wanted the Palestinians to unconditionally agree to negotiations on a lasting two-state deal with Israel.

But the British statement on Saturday said that Hague had also advised Israel to "avoid reacting in a way that undermined these goals" for a swift return to peace talks.