The United States on Friday vetoed a draft U.N. Security Council resolution, which would have condemned continued Israeli settlement building on Palestinian land.
U.S. ambassador to the United Nations Susan Rice said Washington had "regrettably" chosen to oppose the resolution, sponsored by some 130 countries, after seeking its compromise measure was rejected.
"This draft resolution risks hardening the positions of both sides," Rice said. "It could encourage the parties to stay out of negotiations."
And she stressed Washington's veto -- the first by President Barack Obama's administration at the United Nations -- should not be taken as U.S. support for settlement building.
"We reject in the strongest terms the legitimacy of continued Israeli settlement activity," she told the Council.
But she said the United Nations was not the correct place to try to resolve the decades-old Israel-Palestinian conflict, despite the stalemated Middle East peace talks.
"While we agree with our fellow council members and indeed with the wider world about the folly and illegitimacy of continued Israeli settlement activity, we think it unwise for this council to attempt to resolve the core issues that divide Israelis and Palestinians," she said.
The other 14 Security Council members voted in favor of the draft resolution. But the United States, as one of the five permanent council members with the power to block any action by the Security Council, voted against it and struck it down.
In a joint statement, France, Britain and Germany reiterated "the illegality of settlements and the threat it constituted to a two-state
They urged both parties to return to direct negotiations, adding the goal "remained an agreement on final status and the welcoming of Palestine as a full member of the United Nations in September 2011."
"Re-evaluate entire process of negotiations"
In a swift reaction, a senior Palestinian official said the U.S. veto was "unfortunate and affects the credibility of the American administration."
As a result, the Palestinians will "re-evaluate the entire process of negotiations" towards peace in the Middle East, said Yasser Abed Rabbo, secretary general of the Palestine Liberation Organization (PLO).
Ahead of the vote, the United States had put increasing pressure on the Palestinians to drop their backing for the resolution, but to no avail, with president Mahmoud Abbas even rejecting a direct appeal from U.S. President Barack Obama.
U.N. diplomats say the Palestinian Authority, which has been trying to defend itself against critics who accuse it of caving in to the Americans and Israelis during peace talks, was eager to show that it can stand up to Washington.
Obama had suggested that the Security Council would instead issue a non-binding statement calling on Israel to implement a settlement freeze. But Abbas refused.
The Palestinians have accused Washington of failing to do enough to rein in Israeli settlement construction in east Jerusalem and the West Bank, which they say is laying down territorial realities on land claimed by the Palestinians for their future state.
Return to negotiating table
Israel meanwhile urged the Palestinians to return to the negotiating table without preconditions.
"It's a short way between Ramallah and Jerusalem, and all the Palestinians should do is to return to the negotiating table without preconditions," foreign ministry spokesman Yigal Palmor said in a statement.
"Only thus, and not through seizing the Security Council, will it be possible to advance the peace process so as to benefit both parties and to serve the cause of peace and security throughout the region."
World Jewish Congress President Ronald Lauder thanked Obama, saying his veto showed "America's support for the rights of the Jewish state and for the Middle East peace process." Other pro-Israel groups also praised Obama.
U.S. attempts to coax Israel into renewing the freeze ran aground in December, with the Palestinians refusing to return to the negotiating table while Jewish settlers build on land they want for a future state.
Egypt on Saturday denounced U.S. veto describing Israeli settlements as illegal, saying it damaged Washington's credibility as a peace broker.
Friday's veto "disappointed the hopes of the people, not only Palestinian and Arab, but also on an international level," the foreign ministry said in a statement.
"The veto, which contradicts the American public stance rejecting settlement policy, will lead to more damage of the United States's credibility on the Arab side as a mediator in peace efforts," it said.
Jewish settlement activity on Palestinian land seized during the 1967 Six-Day War is considered illegal by the international community, including the United States.
It is one of the bitterest aspects of the Israeli-Palestinian conflict.
New York-based Human Rights Watch issued a statement saying the U.S. veto undermined international law and suggested the Obama administration was being hypocritical.
"President Obama wants to tell the Arab world in his speeches that he opposes settlements, but he won't let the Security Council tell Israel to stop them in a legally binding way," said HRW's Middle East director, Sarah Leah Whitson.
They are the main obstacle to U.S.-brokered peace talks between Israel and the Palestinians, who backed out of the talks over Israel's refusal to freeze settlement activity.