Israel must withdraw all settlers from the West Bank or potentially face a case at the international criminal court (ICC) for serious violations of international law, says a report by a United Nations agency that was immediately dismissed in Jerusalem as "counterproductive and unfortunate".

All settlement activity in occupied territory must cease "without preconditions" and Israel "must immediately initiate a process of withdrawal of all settlers", said the UN Human Rights Council (UNHRC). Israel, it said, was in violation of article 49 of the fourth Geneva convention, which forbids the transfer of civilian populations to occupied territory.

The settlements were "leading to a creeping annexation that prevents the establishment of a contiguous and viable Palestinian state and undermines the right of the Palestinian people to self-determination," it said.

The UNHRC report broadly restated international consensus on the illegality of Israeli settlements. But its conclusions are likely to bolster the Palestinians following their admission last November to the UN as a non-member state, which potentially gives them recourse to the ICC.

"The Rome statute establishes the international criminal court's jurisdiction over the deportation or transfer, directly or indirectly, by the occupying power of parts of its own population into the territory it occupies, or the deportation or transfer of all or parts of the population of the occupied territory within or outside this territory," said the UNHRC report .

It added: "Ratification of the statute by Palestine may lead to accountability for gross violations of human rights law and serious violations of international humanitarian law and justice for victims."

In a statement, the Israeli foreign ministry said: "Counterproductive measures – such as the report before us – will only hamper efforts to find a sustainable solution to the Israel-Palestinian conflict. The human rights council has sadly distinguished itself by its systematically one-sided and biased approach towards Israel. This latest report is yet another unfortunate reminder of that."

Israel refused to co-operate with UNHRC investigators over the report, barring them from access to the West Bank. Investigators conducted more than 50 interviews in Jordan with Palestinians about the impact of settlements, the confiscation of and damage to land, and violent attacks by settlers.

Hanan Ashrawi, a prominent Palestinian politician, said the report's findings were a "clear and unequivocal indictment of the illegal Israeli settlement policies and practices." Israel, she added, was "liable to prosecution".

"The report concludes that the goal behind the terror and violence of the Israeli settlers is to expel the Palestinians from their lands in order to expand illegal settlements; this is a clearly a form of forced transfer, and a proof of Israel's policy of ethnic cleansing," she said.

Earlier this week, Israel became the first country to refuse to participate in a "universal periodic review" of the human rights records of the UN's 193 member states, conducted by the UNHRC.

Palestinian and Israeli human rights group said Israel's boycott of the review set a "dangerous precedent … that could be followed by other states refusing to engage with the UN in order to avoid critical appraisals".

The UNHRC rescheduled the review for later in the year in order to give Israel time to reconsider its stance.

Israel also refused to co-operate with a UN investigation, headed by Richard Goldstone, into the three-week war in 2008-09, and it has refused entry to Israel to Richard Falk, the UN's special rapporteur on human rights in the Palestinian territories, since his appointment in 2008.

According to the UNHRC's report on settlements, Israel has established around 250 settlements in the West Bank and East Jerusalem since 1967, home to more than half a million Israeli citizens.

The settlements impede Palestinian access to water resources and agricultural lands, it said.

Following the Palestinians' upgrade to non-member state status, the Israeli government announced a fresh wave of settlement-building, including the development of a highly sensitive swath of land east of Jerusalem known as E1. Palestinians and most international diplomats say construction on E1 will effectively close off East Jerusalem from the West Bank and impede a territorially contiguous Palestinian state.