Palestinian president Mahmud Abbas warned Tuesday that he would declare the peace process over unless Israel cancels tenders for nearly 20,000 new settler homes.

The tender announcement was the largest ever made by Israel in the occupied West Bank, settlement watchdog Peace Now said, and threatened to add sharply to the 550,000 Israeli settlers already living in the territory, including annexed Arab east Jerusalem.

Washington, whose top diplomat John Kerry was in the region just last week in a bid to rescue peace talks already faltering after just three months of meetings, expressed "deep concern."

Palestinian negotiator Saeb Erakat told AFP Abbas had tasked him with passing on a formal ultimatum to quit the talks to the Quartet of Middle East peacemakers -- the European Union, Russia, the United Nations and the United States.

"If Israel does not go back on its latest construction plans for the settlements, that will spell a formal declaration of the end of the peace process," Erakat quoted Abbas as saying in his warning.

The Palestinians had already warned on Monday that they regarded no peace deal as better than one that allowed Israel to press on with settlement expansion.

Erakat said that if Israel did not relent on its settlement drive, the Palestinians would also resume their applications for state membership of international bodies, ending a moratorium they agreed to in July under US pressure.

The housing ministry wanted to invite tenders for a total of 20,000 additional settler homes, Peace Now said.

However Prime Minister Benjamin Netanyahu's office opposed some 1,200 of the homes slated for construction in the highly contentious area of the West Bank known as E1.

The area forms a corridor to the east of Jerusalem that the Palestinians say would carve the West Bank in two and effectively destroy any chance of a contiguous state.

But Peace Now director Yariv Oppenheimer said the fact that the government was going ahead with the tendering process for the remaining 18,800 units showed the government's determination to press on with settlement expansion regardless of its impact on the peace talks.

Israel's Haaretz newspaper put the cost of the tendering process at 45 million shekels ($13 million, 10 million euros)

"The setting aside of these public funds suggests the government is serious (about settlement expansion), and suggests it's only pretending to negotiate while it pursues its settlement construction," Oppenheimer said.

"It also shows that the prime minister does not believe in a two-state solution for two peoples (Israelis and Palestinians), contradicting what he says."

US 'deeply concerned'

State Department spokeswoman Jennifer Psaki said Washington was not only concerned by the announcement but also surprised.

"We are deeply concerned by this latest report," Psaki said. "We were surprised by this announcement and are currently seeking further explanation from the government of Israel."

She repeated the longstanding US position on settlements -- reaffirmed by Kerry last week -- that "we do not accept the legitimacy of continued settlement activity."

Psaki said the United States had "called on both sides to take steps to create a positive atmosphere for the negotiations," which, with Kerry's mediation, were relaunched in July after a three-year hiatus.

Settlement construction brought the last round of talks in 2010 to a halt just weeks after they had begun.

Several Israeli officials have claimed the settlement announcements have been in keeping with tacit "understandings" between the two sides linked to the release of 52 veteran Palestinian prisoners since August.

But the Palestinians deny any such agreement exists, a position backed by Kerry last week.

The US top diplomat warned Israel on Thursday that it needed to choose between settlement building and peace, adding that failure to strike an agreement could trigger a new Palestinian uprising.

"The alternative to getting back to the talks is the potential of chaos," Kerry said, warning of a "third intifada."

"How -- if you say you're working for peace ... can you say we're planning to build in the place that will eventually be Palestine? So it sends a message that somehow perhaps you're not really serious."

Israel locked horns with Washington last week over its US ally's efforts to reach a deal with Iran over its controversial nuclear programme.

Newly reappointed Foreign Minister Avigdor Lieberman pledged earlier on Tuesday to work to mend relations.

"Regarding our recent differences with the United States, it's now time to calm things down," Lieberman he said.

Netanyahu had furiously denounced the deal under discussion at talks between the major powers and Iran in Geneva as "dangerous" and a "historic mistake."

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