The EU said Monday it is "deeply dismayed" by Israel's plans for new West Bank settlements, a move which threatens to undercut peace efforts that instead should be revived.

The E1 project that calls for the construction of new settler homes on a strip of West Bank land outside Jerusalem has fuelled a major diplomatic backlash, with experts warning it could wipe out hopes of establishing a viable Palestinian state.

"The European Union is deeply dismayed by and strongly opposes Israeli plans to expand settlements in the West Bank, including in East Jerusalem, and in particular plans to develop the E1 area," the 27 EU foreign ministers said in a statement at the end of a day-long meeting.

The E1 plan "if implemented, would seriously undermine the prospects of a negotiated resolution of the conflict" as it would question the viability of the two-state settlement central to the peace process.

On the day the bloc collected the Nobel Peace Prize, the EU "reiterates that settlements are illegal under international law and constitute an obstacle to peace," it added.

Ministers agreed that in view of recent developments, which include an unprecedented UN upgrade of the Palestinians' diplomatic status, they believed it was now time to take "bold and concrete steps towards peace."

To this end, both sides must "engage in direct and substantial negotiations without pre-conditions in order to achieve a lasting solution to the Israeli-Palestinian conflict, ending all claims."

The EU also called on the Palestinian leadership to use the UN upgrade constructively and not take steps which would "deepen the lack of trust and lead further away from a negotiated solution."

Meanwhile, Palestinian peace negotiator Saeb Erakat said Monday that the Palestinians were looking to reactivate peace talks with Israel with the aim of resolving all final status issues within six months.

Erakat told the official Voice of Palestine radio that the UN vote meant "a new stage" had been reached, convincing the Arab world that the peace process could be reconsidered.

Direct peace talks which began in September 2010 collapsed quickly in a dispute over settlements, with the Palestinians calling for a construction freeze and Israel arguing for a return to talks without such preconditions.

Before the start of talks in 2010, Israel observed a 10-month freeze on new West Bank construction but has refused repeated requests to renew it, dismissing them as an unacceptable "precondition" for talks.

The Palestinians say it is an "obligation" under international law.