Israel's finance minister on Thursday backed plans to build 3,400 homes in a particularly contentious area of the occupied West Bank, calling for the territory's annexation in response to several countries' plans to recognize a Palestinian state.

In response, the United Nations chief warned that building Israeli homes in the area would "put an end to" hopes for a two-state solution to the Israeli-Palestinian conflict.

Israel has long had ambitions to build on the sensitive parcel of land east of Jerusalem known as E1, but the plan has been frozen for decades amid international opposition. 

Israeli settlements in the West Bank are considered illegal under international law, and critics and the international community have warned construction on the roughly 12 square kilometers would undermine hopes for a contiguous future Palestinian state with east Jerusalem as its capital.

The site sits between the ancient city and the Israeli settlement of Maale Adumim, near routes connecting the north and south of the Palestinian territory. There are also separate, frozen plans to expand Israel's separation barrier to envelop the area.

"Those who want to recognize a Palestinian state today will receive a response from us on the ground... Through concrete actions: houses, neighborhoods, roads and Jewish families building their lives," said Bezalel Smotrich, Israel's finance minister.

"On this important day, I call on Prime Minister Benjamin Netanyahu to apply Israeli sovereignty in Judea and Samaria, to abandon once and for all the idea of partitioning the country, and to ensure that by September, the hypocritical European leaders will have nothing left to recognize," the far-right figurehead added, using the Biblical term for the West Bank, which Israel has occupied since 1967.

Britain and France are among several countries to announce in recent weeks plans to recognize a Palestinian state later this year, saying they wanted to keep the two-state solution alive.

Smotrich was speaking at a pro-settlement event on the advancement of plans for the E1 parcel. 

Stephane Dujarric, the spokesman for UN Secretary-General Antonio Guterres, said "If this went ahead — which we call on the Israeli government not to do... it would sever the northern and southern West banks." 

"As the Israeli finance minister and the Palestinians and other NGOs all agree — it would put an end to the prospects of a two-state solution."

The Palestinian foreign ministry condemned the plans and called for "genuine international intervention and the imposition of sanctions on the occupation to compel it to halt the implementation".

"Colonial construction in the E1 area is a continuation of the occupation's plans to destroy the opportunity for the establishment of a Palestinian state," it added.

Israeli NGO Peace Now, which monitors settlement activity in the West Bank, denounced the E1 plan as "deadly for the future of Israel and for any chance of achieving a peaceful two-state solution".

The NGO said the final approval hearing would be held next Wednesday by a technical committee under the defense ministry that has already rejected all objections to the proposals.

After the bureaucratic steps are completed, "infrastructure work in E1 could begin within a few months, and housing construction within about a year", Peace Now said.

The West Bank is home to around three million Palestinians, as well as about 500,000 Israeli settlers.