By Elizabeth Pineau
RAMALLAH, West Bank (Reuters) - French President Francois Hollande called on Israel on Monday to halt settlement building on occupied territory, saying it hampered chances for a peace agreement with the Palestinians.
Israel has announced plans for thousands of new settler homes since U.S.-brokered peace negotiations with the Palestinians began in July after a three-year break.
"For the sake of peace and to reach a deal, France calls for the total and definitive end to settlement building because it compromises the two-state solution," Hollande said at a news conference with Palestinian President Mahmoud Abbas.
Abbas described settlements as "the greatest threat that could end the peace process and lead to its failure".
But he reaffirmed that talks with Israel would continue for the full nine-month period agreed with the United States.
Hollande held talks on Sunday with Israeli leaders in Jerusalem which focused on international efforts to reach an agreement with Iran over its disputed nuclear program.
He met Abbas in Ramallah, the Palestinians' seat of government in the occupied West Bank, and laid a wreath on the grave of Yasser Arafat, their guerrilla leader and first president who died in 2004.
After a public signing of economic aid and development agreements, Hollande said France had donated more in budget support to the Palestinians than to any other nation.
Palestinian negotiators last week offered to resign in protest against Israel's settlement drive, but Palestinian officials confirmed to Reuters that they would likely stay in place until they agreed to return or a new delegation was formed.
Tzipi Livni, Israel's chief negotiator, told Israeli radio that her Palestinian counterpart was "back in business" and that talks, paused for more than a week, would resume.
During a special session of Israel's parliament to welcome Hollande, Israeli Prime Minister Benjamin Netanyahu invited Abbas to come to the Knesset and offered to reciprocate with a visit to Ramallah but attached terms that Abbas appeared unlikely to accept.
"I call on (Abbas) today ... come to Israel's Knesset. I will come to Ramallah. Come to this stage and acknowledge the historic truth: the Jews have a connection of almost 4,000 years to the land of Israel," Netanyahu said in a speech.
In his address to the Knesset, Hollande repeated his call for a halt to settlement building and drew applause from Israeli-Arab lawmakers.
Palestinians seek to establish a state in the West Bank and the Gaza Strip, now under the control of Abbas's Hamas Islamist rivals, with East Jerusalem as its capital. They fear Israel's settlements will deny them a viable country.
More than 500,000 Israelis live in the West Bank and East Jerusalem alongside 2.5 million Palestinians. Israeli cites historical and Biblical links to those areas.
Most countries consider the settlements Israel has built on land it captured in the 1967 Middle East war to be illegal.
(Additional reporting by Noah Browning and Crispian Balmer, Editing by Jeffrey Heller and Angus MacSwan)