The dispute on Tuesday came after Israel last week declared 370 acres in the occupied West Bank as state land and approved plans to build 153 new settler homes.

The UN branded the Israeli settlement expansions as illegal, arguing that they are an attempt to undermine plans for a Palestinian state by absorbing land earmarked for the new country.

Watch video 01:11 Israeli settlers in Hebron spark Palestinian outrage

Speaking at a Security Council debate on Tuesday, Ban Ki-moon said progress towards peace between Israelis and Palestinians "requires a freeze of Israel's settlement enterprise."

"These provocative acts are bound to increase the growth of settler populations, further heighten tension and undermine any prospects for a political road ahead," Ban said.

"The parties must act - and act now - to prevent the two-state solution from slipping away forever."

'Illegitimate' occupation

Israeli Prime Minister Benjamin Netanyahu rebuked Ban's comments in a statement.

"The comments of the UN Secretary General encourage terror," Netanyahu said. "There is no justification for terror.

"The Palestinian murderers do not want to build a state; they declare publicly that they want to destroy a state," Netanyahu added. "The UN has long ago lost its neutrality and its moral powers."

Israel seized the West Bank from Jordan in the 1967 war. Many members of the international community consider the prolonged occupation to be illegitimate.

Israeli evictions

The war of words on Tuesday came just days after Israel moves Jewish settlers out of Hebron homes. Israeli forces evicted around 80 Jewish people from a property in Hebron in the West Bank.

Although the Israelis claim they bought the homes legally, the settlers did not follow established procedure during their move, Israel's Defense Minister Moshe Ya'alon said.

Selling property to Jews is a taboo among Palestinians and is illegal under Palestinian law. In several cases, sellers have been killed by Palestinian gunmen.

ksb/jr (AP, AFP, Reuters)