Israel should stop building settlements, denying Palestinian development and designating land for exclusive Israeli use that Palestinians seek for a future state, the Middle East peace quartet – the US, Russia, the EU and the UN – recommended today in a an eagerly awaited report.

The report by the four entities sponsoring the stalled peace process said the Israeli policy "is steadily eroding the viability of the two-state solution".

"This raises legitimate questions about Israel's long-term intentions, which are compounded by the statements of some Israeli ministers that there should never be a Palestinian state," according to the eight-page report.

Amid a spike in violence, the quartet also criticised Palestinian leaders for "not consistently and clearly" condemning terrorist attacks and said illicit arms build up and militant activities in Gaza – controlled by Islamist group Hamas – must stop.

On Friday, an Israeli family car came under Palestinian gunfire near the Jewish settlement of Ottniel and crashed, killing a man, medics said. In the nearby city of Hebron, Israeli police shot dead a Palestinian woman who they said tried to stab one of them after she was detained.

Diplomatic sources said the report carries significant political weight as it has the backing of close Israeli ally America, which has struggled to revive the peace talks amid tensions between Israeli Prime Minister Benjamin Netanyahu and US President Barack Obama.

Relations between the rightist Israeli leader and the Democratic president have yet to recover from their feud over last year's US-led nuclear deal with Israeli foe Iran.

Netanyahu's office welcomed some aspects of the quartet report but said Israel took issue with numerous factual and policy assertions. The report also "perpetuates the myth that Israeli construction in the West Bank is an obstacle to peace", the statement said.

The Israeli–Palestinian conflict intensifies Show all 10 1 /10 The Israeli–Palestinian conflict intensifies The Israeli–Palestinian conflict intensifies Medics evacuate a wounded man from the scene of an attack in Jerusalem. A Palestinian rammed a vehicle into a bus stop then got out and started stabbing people before he was shot dead AP The Israeli–Palestinian conflict intensifies Israeli ZAKA emergency response members carry the body of an Israeli at the scene of a shooting attack in Jerusalem. A pair of Palestinian men boarded a bus in Jerusalem and began shooting and stabbing passengers, while another assailant rammed a car into a bus station before stabbing bystanders, in near-simultaneous attacks that escalated a month long wave of violence AP The Israeli–Palestinian conflict intensifies Youths attend the funeral of Ahmad Sharake who was shot during clashes with Israeli forces in Jelazun refugee camp, near Ramallah, West Bank. Tensions in the area continue to run high following a series of stabbing attacks that have occurred around Israel in clashes between Palestinian youths and Israeli security forces Getty Images The Israeli–Palestinian conflict intensifies Palestinians throw molotov cocktail during clashes with Israeli troops near Ramallah, West Bank. Recent days have seen a series of stabbing attacks in Israel and the West Bank that have wounded several Israelis AP The Israeli–Palestinian conflict intensifies Women cry during the funeral of Palestinian teenager Ahmad Sharaka, 13, who was shot dead by Israeli forces during clashes at a checkpoint near Ramallah, at the family house in the Palestinian West Bank refugee camp of Jalazoun, Ramallah AP The Israeli–Palestinian conflict intensifies A wounded Palestinian boy and his father hold hands at a hospital after their house was brought down by an Israeli air strike in Gaza Reuters The Israeli–Palestinian conflict intensifies Palestinians look on after a protester is shot by Israelis soldiers during clashes at the Howara checkpoint near the West Bank city of Nablus EPA The Israeli–Palestinian conflict intensifies A lawyer wearing his official robes kicks a tear gas canister back toward Israeli soldiers during a demonstration by scores of Palestinian lawyers called for by the Palestinian Bar Association in solidarity with protesters at the Al-Aqsa mosque compound in Jerusalem's Old City, near Ramallah, West Bank AP The Israeli–Palestinian conflict intensifies Undercover Israeli soldiers detain a Palestinian in Ramallah Reuters The Israeli–Palestinian conflict intensifies Palestinian youth burn tyres during clashes with Israeli soldiers close to the Jewish settlement of Bet El, in the West Bank city of Ramallah, after Israel barred Palestinians from Jerusalem's Old City as tensions mounted following attacks that killed two Israelis and wounded a child

Nabil Abu Rdainah, the spokesman for Palestinian President Mahmoud Abbas, expressed disappointment with the quartet report.

"Any report that does not include the full withdrawal to the 1967 borders, including occupied Jerusalem, and does not include a recognition of the illegality of settlement will not lead to real and lasting peace and will lead to more tension and more instability in the region," he said in a statement.

UN Middle East envoy Nickolay Mladenov briefed the UN Security Council on Thursday on the report and said it would be up to the council and the international community to use the report to decide the way forward.

The quartet said urgent affirmative steps needed to be taken to "prevent entrenching a one-state reality of perpetual occupation and conflict".

The report said Israel had taken for its exclusive use some 70 per cent of Area C, which makes up 60 per cent of the occupied West Bank and includes the majority of agricultural lands, natural resources and land reserves.

Under the Oslo accords of the mid-1990s, Israel retains full control over Area C, where large tracts have been declared closed military areas.

"Israel should implement positive and significant policy shifts, including transferring powers and responsibilities in Area C," the quartet report said.

It said only one permit for Palestinian housing construction in Area C was reportedly approved in 2014, while there did not appear to have been any approved in 2015.

The report said at least 570,000 Israelis are living in the settlements, which most countries deem illegal.

"Israel should cease the policy of settlement construction and expansion, designating land for exclusive Israeli use and denying Palestinian development," the report recommends.

Since October, Palestinian street attacks have killed at least 33 Israelis and two visiting Americans. Israel has killed at least 201 Palestinians, 136 of whom it said were assailants. Others were killed during clashes and protests.

"The Palestinian Authority should act decisively and take all steps within its capacity to cease incitement to violence and strengthen ongoing efforts to combat terrorism, including by clearly condemning all acts of terrorism," the quartet said.

In response to violence this week, Israel said it would reduce monthly transfers of tax collected on behalf of Palestinians.