US Secretary of State John Kerry met with Palestinian leader Mahmud Abbas Wednesday, hoping to rescue faltering peace talks after Israel's prime minister said the Palestinians were creating "artificial crises."

Kerry is striving to keep the fragile talks on track amid recriminations on both sides following three months of direct talks that have apparently made little progress in resolving the decades-old conflict.

Israel's Prime Minister Benjamin Netanyahu earlier hit out at the Palestinians, who had threatened to quit the talks over Israel's continuing settlement construction on occupied land they want for their future state.

Netanyahu said he was "concerned about the progress" of the talks, as Kerry made his seventh visit to Israel and the West Bank since he became the top US diplomat in February.

"I see the Palestinians continuing with incitements, continuing to create artificial crises, continuing to avoid, run away from the historic decisions that are needed to make a genuine peace," Netanyahu said at the start of early morning talks with Kerry.

"I hope your visit will help steer them back to a place where we could achieve the historical peace that we seek," he said, before the two men met for three hours.

Kerry sought to calm the situation later, driving to Bethlehem to unveil $75 million (56 million euros) in new US aid for Palestinian projects in the West Bank, including roads, schools, clinics and community centres.

"As in any negotiations, there will be moments of up and moments of down. It goes back and forth," he told a crowd gathered in the sunshine outside the Church of the Nativity, the traditional site of Jesus's birth.

"But President (Barack) Obama and I are determined and neither of us will stop in our efforts to pursue the possibility. We are determined to try to bring lasting peace to the people of this region," he said.

"We are convinced that despite the difficulties both leaders, president Abbas and Prime Minister Netanyahu, are also determined to work towards this goal."

All sides have set themselves the ambitious aim of reaching a final peace deal within nine months -- towards the end of April.

Kerry stressed the need to improve the Palestinian economy.

"We need to develop the economies to show both peoples that peace has the benefits of economic opportunity and prosperity and a better quality of life."

He joked he was "the carrier of money" and said "nowhere better represents the untapped potential of the Palestinian economy than where we are standing today."

Shop owner Nabil Giacaman, who is a third generation Palestinian wood carver and owner of the Christmas House in Bethlehem's Manger Square, welcomed Kerry's visit.

It was "a good thing, to show the world that we are in a good state here, there are no problems, everything is peaceful," he told AFP. However, he also bemoaned the falling number of tourists.

He expressed hope that one day the Israeli separation barrier cutting off areas of the West Bank would be removed.

An 'unprecedented settlement attack'

Just before Kerry's arrival on Tuesday, a meeting between the negotiators in Jerusalem broke down over settlements, a senior Palestinian official told AFP, with Israel advancing plans for some 3,700 new settler homes in the past week alone.

The Palestinians have repeatedly denied Israeli claims that the settlement announcements are in keeping with tacit "understandings" between the two sides linked to the release last week of 26 veteran Palestinian prisoners.

"Israel claims there's a deal to continue settlement building in exchange for releasing the last batch of prisoners, but this is not true at all," the official said.

"The Palestinian delegation reiterated to the American side its absolute rejection of these claims. But the Israeli side insists on continued settlement building, and we can't continue talks in light of this unprecedented settlement attack."

In recent days, three Israeli newspapers reported that a draft US proposal for an interim agreement, to be presented to the sides early next year, was in the works.

But Kerry has flatly denied any such move, telling reporters earlier this week: "There is no other plan at this point in time."