Israel is to build a "record" 20,000 new settler homes in the occupied West Bank, a watchdog said Tuesday, despite US and Palestinian warnings that such moves threaten peace talks.

The revelation by settlement watchdog Peace Now came just days after a visit by US Secretary of State John Kerry to try to salvage the negotiations, during which he said Israeli settlement activity in the Palestinian territories is "illegitimate."

And on Monday the Palestinians had warned that no peace deal with Israel was better than one that allows it to push ahead with settlement construction.

"The housing ministry announced tenders for the planning of 20,000 settler homes," Peace Now director Yariv Oppenheimer told AFP.

"This is a record," he added.

Prime Minister Benjamin Netanyahu's office stressed he had 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.

Past proposals for construction in the area have angered the United States and the announcement could exacerbate tensions between the two allies, who are already locked in a war of words over Iran.

Oppenheimer said the fact that the government was going ahead with the tendering process for the remaining 18,800 units -- at a cost the Haaretz newspaper put at 45 million shekels ($13 million, 10 million euros) -- showed the government's determination to press on with settlement expansion regardless of the peace talks.

"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," he 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."

Threat to peace talks

Israeli 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 during his visit to Israel and the Palestinian territories last week.

Kerry 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 in a joint interview with Israel's Channel 2 and the Palestinian Broadcasting Corporation, 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."

The Palestinians have warned that Israel's settlement drive could spell the end of peace talks.

"In the absence of political will from the Israeli side to take the negotiations seriously, we believe that it is better not to reach a deal than to reach a bad deal," negotiator Mohammed Shtayyeh said Monday.

He accused Israel of taking part in the talks solely as a front to deflect international pressure over its continuing settlement construction.

Israel already 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 on Tuesday to work to mend relations after the public row over the nuclear talks between Iran and the major powers in Geneva.

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

Prime Minister Benjamin Netanyahu had furiously denounced the deal under discussion in Geneva, describing it as "dangerous" and a "historic mistake".