Secretary of State John Kerry headed for talks with Jordan's king Thursday after reaffirming US opposition to Israeli settlements, as the contentious issue threatens to derail the peace process.

The top US diplomat is due in Amman for a meeting with King Abdullah, before once again holding talks with Palestinian president Mahmud Abbas, this time in the Jordanian capital.

Kerry has single-mindedly fought to get the Israeli-Palestinian peace negotiations back on track despite recriminations on both sides.

During marathon talks on Wednesday, Prime Minister Benjamin Netanyahu denounced the Palestinians for threatening to leave the talks over Israel's continued settlement construction on land they want for their future state.

The Israeli leader told Kerry, who is on his seventh visit to Israel and the West Bank since February, that he was "concerned about the progress" of the talks, accusing the Palestinians of fabricating reasons to avoid making tough decisions.

"I see the Palestinians... continuing to create artificial crises, continuing to avoid, run away from the historic decisions that are needed to make a genuine peace," Netanyahu said.

In the West Bank city of Bethlehem, Kerry sought to play down the dispute.

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

But following more than two hours of talks with the Palestinians, including 40 minutes one-on-one with Abbas, he was quick to reiterate US opposition to the settlements.

"We consider now, and have always considered, the settlements to be illegitimate," Kerry said.

No Palestinian agreement to condone settlements

"I want to make it extremely clear that at no time did the Palestinians in any way agree, as a matter of going back to the talks, that they could somehow condone or accept the settlements," he added.

"That is not to say that they weren't aware -- or we weren't aware -- that there would be construction.

"But that construction, importantly, in our judgment, would be much better off limited as much as possible in an effort to help create a climate for these talks to be able to proceed effectively."

His remarks related to a bitter row that has erupted over Israeli moves during the past week to push ahead with construction of more than 3,700 new settler homes.

Talks between the two negotiating teams on Tuesday broke down over the issue, a senior Palestinian official told AFP.

Several Israeli officials have claimed the settlement announcements were in keeping with tacit "understandings" between the two sides linked to the release last week of 26 veteran Palestinian prisoners.

Their comments sparked furious denials from the Palestinians.

"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," the Palestinian official said.

Israel denies its construction is a violation of the terms which brought the two sides back to the table.

"We agreed three months ago on certain terms. We stand by those terms, we abide scrupulously by the terms of the agreement and the understanding which launched negotiations," Netanyahu said early Wednesday.

Despite the row, Kerry later told Israeli President Shimon Peres that the peace process "is not mission impossible. It can happen."

Kerry also had a late dinner with Netanyahu in Jerusalem, after which the two dismissed their teams and again huddled alone for private talks, meeting for a total of seven hours throughout the day.

During his stopover in Bethlehem, Kerry unveiled $75 million (56 million euros) in fresh US aid for Palestinian infrastructure projects in the West Bank.

"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 said, adding that Bethlehem was a key example of the "untapped potential" of the Palestinian economy.

Shop owner Nabil Giacaman, a third generation Palestinian wood carver and owner of the Christmas House in 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, saying he hoped to see a rise in the number of tourists.