The Middle East peace process suffered a fresh blow after the entire Palestinian negotiating team resigned in protest against continued Israeli settlement building.

Negotiator Mohammed Shtayyeh told AFP the resignation move Wednesday was in response to "increasing settlement building (by Israel) and the absence of any hope of achieving results."

"Until now, president Abbas has not accepted our resignation," he added.

Shtayyeh held Israel "completely responsible for the failure of negotiations, because of the continuation and escalation of settlement building."

Another negotiator, speaking on condition of anonymity, confirmed the resignations.

"Abbas has a number of choices here -- he can refuse or accept and form a new delegation, or demand a new negotiations mechanism," he said, referring to the possibility of indirect talks through a US team.

Chief negotiator Saeb Erakat is among those who submitted their resignations, the sources said.

US State Department spokeswoman Jen Psaki noted that Abbas remained committed to peace talks "for the nine-month agreed-upon time frame."

"Both sides remain committed. Both sides reaffirmed their commitment last week. So we will continue to proceed," she told reporters.

Following mediation by Washington, direct talks resumed in July after a three-year hiatus that was due primarily to Palestinian refusal to talk while settlement expansion continued.

Since then Israel has announced plans to build thousands of new settler homes in the occupied West Bank -- territory the Palestinians want for their future state under any peace deal.

Late on Tuesday, Prime Minister Benjamin Netanyahu ordered the cancellation of plans to build 20,000 more homes in the West Bank, hours after their announcement sparked US and Palestinian criticism.

Netanyahu publicly forced Housing Minister Uri Ariel, who had approved the plans, to back down after drawing US condemnation for a settlement project the Palestinians warned would end a fragile peace process.

His dramatic intervention to halt the plan to build what experts said would be the biggest ever batch of settler homes on occupied Palestinian territory came after fierce criticism from the US, which has been pushing for a peace agreement between Israel and the Palestinians.

Netanyahu directly linked his reprimand of Ariel to Israel's plans to scupper a possible international deal with its arch-foe Iran over its disputed nuclear programme.

"At this time, the attention of the international community must not be diverted from the main effort -- preventing Iran from receiving an agreement that will allow it to continue its military nuclear program," Netanyahu said.

Abbas had warned that he would declare the peace process over if they went ahead.

He told Egyptian TV channel CBC late Tuesday that the negotiators had presented their resignations, but that he had not yet accepted them.

For his part, UN Middle East special coordinator Robert Serry issued a statement reiterating the position of Secretary General Ban Ki-moon that settlements are "contrary to international law and an obstacle to peace."

Hamas spokesman Abu Zuhri dismissed the resignations as a media stunt.

Speaking on behalf of the Islamist group, which holds sway in the Gaza Strip, he said it was necessary "to stop the negotiations, not change the negotiators."

A year after trading fire in a week-long war in Gaza, tensions between Israel and Hamas are running high.

More than 170 Palestinians and six Israelis were killed when hostilities erupted after an Israeli missile killed Hamas military chief Ahmed Jaabari last November 14.

"The Israeli soldier who was stabbed this morning by a Palestinian on a bus at the Afula bus station has died of his wounds in hospital," police spokesman Micky Rosenfeld told AFP.

Last month Israel announced the discovery of a "terror tunnel" 1.7 kilometres (one-mile) long from Gaza under the border into Israel.

Last week, the Hamas government said it had added studies to encourage "resistance to Israel" to the territory's public schools curriculum.

An Israeli soldier died on Wednesday after a Palestinian youth stabbed him on board a bus in the north of the country, police said.

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