JERUSALEM (Reuters) - Israel's foreign minister on Saturday dismissed criticism by the European Union of Jewish settlement on occupied land the Palestinians seek for a state, advising the 27-nation bloc to attend to its own problems instead.

The comments by Avigdor Lieberman, a hardliner who serves as Israel's top diplomat by dint of his clout in Prime Minister Benjamin Netanyahu's coalition government, suggested an appeal to right-wing voters ahead of the January 22 national election.

In a statement reflecting long-standing EU policy, the bloc's high representative for foreign affairs, Catherine Ashton, said on Friday she "deeply regrets" Israel's announcement of plans to expand Gilo settlement between East Jerusalem and the West Bank, lands it seized in a 1967 war.

"Settlements are illegal under international law and threaten to make a two-state solution impossible," she said, referring to more than two decades of efforts to negotiate the creation of a Palestinian state alongside the Jewish state.

Lieberman said in a statement such censures "attest to a fundamental lack of ability to understand regional reality" and "merely encourage the Palestinian side to continue to refuse to sit and negotiate, and to pursue anti-Israel activity in the international sphere".

Israel is preoccupied by the Palestinians' plan to sidestep the deadlocked talks by asking the United Nations next month to upgrade their member status, and has lobbied the Europeans and others to oppose the move.

Israel considers all of Jerusalem - including the annexed eastern sector and nearby settlements like Gilo - its capital, a position not accepted internationally. Most world powers deem the settlements illegal.

Lieberman concluded his statement by suggesting the European Union "focus, for now, on the problems arising among the various peoples and national groups on Europe's territory, and once there is a successful solution we would be happy to hear recommendations for solving the problems with the Palestinians".

(Writing by Dan Williams; editing by Andrew Roche)