UN chief Ban Ki-moon called on Israelis and Palestinians on Friday to overcome "deep scepticism" that he said risked thwarting efforts to reach a peace agreement.

"We must overcome the deep scepticism that comes from 20 years of stalemate," Ban said at a meeting in Jerusalem with Israeli President Shimon Peres.

"I urge all parties to avoid actions that risk undermining the negotiations," a statement quoted him as saying.

"Both sides need to sustain an environment conducive for the peace process to move forward," he said speaking two days after US-brokered peace talks resumed in Jerusalem.

Wednesday's talks, the fruit of months of intensive US diplomatic efforts to bring the two sides back to the negotiating table after a nearly three-year break, were overshadowed by a new row over Israeli settlement plans for the occupied territories.

In the run-up to the talks, Israel announced plans to build more than 2,000 new settler homes in annexed east Jerusalem and elsewhere in the occupied West Bank, infuriating Palestinian officials.

Ban himself criticised the Israeli plans at a meeting with Palestinian president Mahmud Abbas in the West Bank town of Ramallah on Thursday.

The UN chief told reporters he was "deeply troubled by Israel's continued settlement activity in the West Bank, including east Jerusalem.

"Settlement activity is deepening the Palestinian people's mistrust in the seriousness on the Israeli side towards achieving peace.

"It will ultimately render a two-state solution impossible," he warned.

But Israel's Prime Minister Benjamin Netanyahu played down the settlements issue at a meeting with Ban later on Friday.

"The root cause (of the conflict) was and remains the persistent refusal to recognise the Jewish state in any boundary," Netanyahu said.

"It doesn't have to do with the settlements - that's an issue that has to be resolved, but this is not the reason that we have a continual conflict.

"If we build a few hundred apartments... in urban blocks that everybody knows... will be part of the final peace map in Israel, I think these are not the real issues that we need to discuss," he continued.

"The real issue is how to get a demilitarised Palestinian state to finally recognise and accept the one and only Jewish state."