Israel said Thursday it was halting peace talks with the Palestinians following their unity deal with Hamas, as the faltering US-backed process approached its deadline.

Prime Minister Benjamin Netanyahu criticised the agreement between the rival factions as a move that "kills peace," but senior Palestinian official Saeb Erakat blamed Israeli settlement activity for killing off the process.

On Wednesday, the Palestine Liberation Organisation (PLO) -- the internationally recognised representative of the Palestinian people -- and the Gaza Strip's Islamist Hamas rulers signed a reconciliation agreement.

They agreed to form a "national consensus" government under Abbas within weeks.

In response, Israel's security cabinet announced Thursday it would "not negotiate with a Palestinian government backed by Hamas" and vowed unspecified "measures" in response.

Any new measures would follow a raft of financial sanctions unveiled this month when the Palestinians applied to adhere to 15 international treaties.

"The pact with Hamas kills peace," Netanyahu told NBC television shortly after the cabinet decision.

- 'Israel chose settlements' -

Netanyahu said it was signed "while Israel was making efforts to advance the negotiations with the Palestinians" and was "a direct continuation of the Palestinian recalcitrance to promote negotiations," due to expire on April 29.

Israel's chief negotiator, Justice Minister Tzipi Livni, said they had proposed a "creative solution" on Tuesday that would enable extending talks.

She said Israel was only "suspending" talks and "the door has not been shut today," stressing the sanctions planned were "measured" and "would not collapse the Palestinian Authority."

But Erakat told AFP "Netanyahu's government has been asked for years to choose between peace and settlements, and it chose settlements."

He said the Palestinian leadership would "look into all options to respond" to Israel's decisions.

Arab League chief Nabil al-Arabi said in a statement the group "fully supports Palestinian president Abbas in facing all the pressures applied on him by Israel."

US envoy Martin Indyk has repeatedly met both sides to try to salvage the negotiations, and met with Abbas in Ramallah on Thursday.

US Secretary of State John Kerry insisted peace talks could still advance if the sides compromised.

"There's always a way forward, but the leaders have to make the compromises to do that.We may see a way forward, but if they're not willing to make the compromises necessary it becomes very elusive," he said.

Abbas says he will not extend the negotiations unless Israel agrees to freeze all settlement construction in the occupied West Bank, including annexed east Jerusalem, and frees Arab prisoners earmarked for release this month.

He has also demanded an immediate start to negotiations on the future borders of the Palestinians' promised state.

- 'Palestinian conditions unacceptable' -

Israel has dismissed all three conditions as unacceptable.

Jibril Rajub, a Fatah leader, told AFP "the next national consensus government will proclaim loud and clear that it accepts the Quartet's conditions".

The Middle East Quartet demands that Hamas recognise Israel and existing agreements between it and the PLO, and renounce armed struggle.

UN Middle East peace envoy Robert Serry said Abbas had assured him Thursday that the unity government would respect agreements "on the basis of the PLO commitments."

"President Abbas emphasised that these commitments include recognition of Israel, non-violence and adherence to previous agreements," Serry's office said, adding that Abbas "reiterated his continued commitment to peace negotiations and to non-violent popular protests."

The UN "continued support for unity on this basis as the only way to reunite the West Bank and Gaza under one legitimate Palestinian Authority, welcoming this process which includes long-overdue Palestinian elections," the statement read.

Washington warned Wednesday that the Palestinian deal threatened to scupper any chance of rescuing the talks.

"It's hard to see how Israel can be expected to negotiate with a government that does not believe in its right to exist," State Department spokeswoman Jen Psaki said.

Abbas's writ has effectively been confined to autonomous areas of the Israeli-occupied West Bank since Hamas evicted his loyalists from Gaza in 2007.

Hamas agreed to the formation of a joint administration under his leadership within five weeks.

Similar past agreements have been reached but not implemented.

When Hamas won Palestinian parliamentary elections in 2006, the European Union and the United States said they would deal with a government in which it participated only if it renounced violence and recognised Israel and past peace deals.

The EU on Thursday welcomed the unity accord, but said its "top priority is that the current talks continue beyond April 29".