By Lesley Wroughton and Yeganeh Torbati
WASHINGTON (Reuters) - U.S. Secretary of State John Kerry on Wednesday said Israel's building of settlements on occupied land was jeopardizing Middle East peace, voicing unusually frank frustration with America's longtime ally weeks before he is due to leave office.
In a swiftly issued statement, Israeli Prime Minister Benjamin Netanyahu accused Kerry of bias. He said Israel did not need to be lectured to by foreign leaders and looked forward to working with President-elect Donald Trump, who has vowed to pursue more pro-Israeli policies.
In a 70-minute speech, Kerry said Israel "will never have true peace" with the Arab world if it does not reach an accord based on Israelis and Palestinians living in their own states.
Kerry's remarks, and Netanyahu's reply, marked the closing chapter of a bitter U.S.-Israeli relationship during President Barack Obama's administration over differences on settlement-building and the Iran nuclear deal signed last year.
Ties reached a low point last Friday when Washington cleared the way for a U.N. resolution that demanded an end to Israeli settlement building, prompting Israeli government officials to direct harsh attacks against Obama and Kerry.
"Despite our best efforts over the years, the two-state solution is now in serious jeopardy," Kerry said at the State Department. "We cannot, in good conscience, do nothing, and say nothing, when we see the hope of peace slipping away."
The United States had appealed to Israel in public and private to stop the march of settlements countless times, Kerry said.
"In the end, we could not in good conscience protect the most extreme elements of the settler movement as it tries to destroy the two-state solution," he said. "We could not in good conscience turn a blind eye to Palestinian actions that fan hatred and violence. It is not in U.S. interests to help anyone on either side create a unitary state."
His parting words were unlikely to change anything on the ground between Israel and the Palestinians or salvage the Obama administration's record of failed Middle East peace efforts.
Netanyahu said Kerry "obsessively dealt with settlements" and barely touched on "the root of the conflict - Palestinian opposition to a Jewish state in any boundaries".
In a statement, Palestinian President Mahmoud Abbas said he was convinced peace with Israel was achievable, but stood by his demand that Israel halt settlements before talks restart.
Netanyahu, for whom settlers are a key constituency, has said his government has been their greatest ally since Israel captured the West Bank and East Jerusalem in a 1967 war. Some 570,000 Israelis now live in the West Bank and East Jerusalem, together home to more than 2.6 million Palestinians.
Israel expects to receive more favorable treatment from Trump, who takes office on Jan. 20. But Israelis fear Kerry's remarks will put them on the defensive, prompting other countries to apply pressure, including by adding fuel to the boycott, divestiture and sanctions movement against Israel, especially in Europe.
Trump denounced the Obama administration's treatment of Israel before Kerry's speech.
"We cannot continue to let Israel be treated with such total disdain and disrespect. They used to have a great friend in the U.S., but not anymore," Trump said in a series of tweets. "Stay strong Israel, January 20th is fast approaching!"
Trump has vowed to move the U.S. Embassy from Tel Aviv to Jerusalem, which would upset many countries, and has appointed as ambassador a lawyer who raised money for a major Jewish settlement.
Kerry's speech provided some insights into an issue that he personally feels passionate about and had hoped to resolve during his nearly four years as secretary of state. Peace talks have been stalled since 2014.
The United States abstained rather than veto the Dec. 23 U.N. resolution, in what many saw as a parting shot by Obama.
Kerry vigorously defended the resolution. “It is not this resolution that is isolating Israel. It is the permanent policy of settlement construction that risks making peace impossible."
In a pointed reply to Netanyahu who said last week that "Friends don't take friends to the Security Council", and who has insisted the Obama administration had orchestrated the resolution, Kerry hit back, saying: "Friends need to tell each other the hard truths, and friendships require mutual respect."
Kerry defended Obama's commitment to Israel's security and U.S. support for Israel in international platforms. Earlier this year, the United States and Israel agreed $38 billion in military assistance over the next decade.
In Jerusalem on Wednesday, Israel approved construction of a multistory building for settlers in annexed East Jerusalem, an NGO said, after postponing authorization of hundreds of other homes.
Washington considers the settlement activity illegitimate and most countries view it as an obstacle to peace. Israel cites a biblical, historical and political connection to the land - which the Palestinians also claim - as well as security interests.
PARAMETERS FOR PEACE DEAL
Emphasizing that Washington could not impose an outcome, Kerry outlined principles for a two-state solution which envisioned secure and recognized international borders between Israel and a viable and contiguous Palestine - based on the 1967 lines before it seized the West Bank, East Jerusalem and Gaza. The two sides would agree to land swaps.
Netanyahu has described the 1967 lines as indefensible and has said Israel would never return to them.
Kerry also called for an agreed resolution for Jerusalem as the "internationally recognized capital of the two states."
Kerry's speech drew praise from pro-liberal U.S. Jewish group J Street but was rejected by AIPAC, an influential pro-Israel lobby group, which called the speech "a failed attempt to defend the indefensible".
“We salute the clear, courageous and committed speech of John Kerry in favor of peace in the Middle East and the solution for the two States, Israel and Palestine,” French Foreign Minister Jean-Marc Ayrault said.
France will convene some 70 countries on Jan. 15 for a Middle East peace conference in Paris.
Kerry’s proposals did not depart from longstanding U.S. views on the building blocks of a future deal, and echoed elements of a speech former President Bill Clinton gave in 2001 as he prepared to hand over power to George W. Bush.
But back then "the parties were closer, and the United States and Israel were not at such sharp odds," said David Makovsky, a former senior adviser at the State Department on the Israeli-Palestinian issue.
(Additional reporting by Matt Spetalnick in Washington, Jeffrey Heller and Ori Lewis in Jerusalem and Maya Nikolaeva in Paris; Writing by Yara Bayoumy; Editing by Alistair Bell and Howard Goller)