A diplomatic row between Israel and Germany escalated on Friday as Israeli Prime Minister Benjamin Netanyahu accused the German foreign minister of displaying insensitivity by meeting human rights groups a day after the country's Holocaust Remembrance Day.

Germany has traditionally been one of the Israel's closest international allies because of its historic responsibility for the Holocaust.

But Netanyahu said in an interview with the German Bild newspaper that Foreign Minister Sigmar Gabriel had "crossed a red line" by meeting Breaking The Silence and B'Tselem, two Israeli human rights group which campaign against the country's violation of the rights of Palestinians and illegal occupation of the West Bank.

"Foreign diplomats are welcome to meet with civil society activists and members of the opposition and anyone else they'd like," he said.

"But my red line is that I will not meet diplomats who come to Israel and lend legitimacy to fringe radical groups that falsely accuse our soldiers of war crimes and undermine Israeli security."

Netanyahu said that the announcement of the meetings as Israelis were commemorating the victims of the Holocaust was "particularly insensitive".

"These are the days we mourn the murdered members of our people in the Holocaust and our fallen soldiers. The Israeli army is the one force that keeps our people safe today," he said.

Netanyahu cancelled a meeting with Gabriel which had been due to take place last Tuesday because of the row.

He also told Bild that Gabriel had refused to take a call in which Netanyahu said he wanted to explain his position.

German foreign ministry spokesman Martin Schaefer said however that "the offer from the Israeli side for such a phone call was tied to conditions that were not acceptable for us".

"This is because the wish of the Israeli side was for us to exert influence on the people that the German foreign minister was planning to meet," he said, adding that "we found... that not to be an appropriate condition or request for such talks."

Schaefer also rejected Netanyahu's negative description of the NGOs, saying "our view on this is a bit different".

Netanyahu lays a wreath during a ceremony marking the annual Holocaust Remembrance Day at the Yad Vashem Holocaust Memorial in Jerusalem (AFP)

He described Breaking the Silence as an organisation that collected testimonies from former Israeli soldiers who had served in the West Bank who had "formed their own ideas about what it means for a constitutional democracy like Israel to run such an occupation regime".

"That's why the German foreign minister does not feel bad about meeting these former soldiers... to better understand what really happened there," said Schaefer.

Netanyahu's decision to cancel the meeting with Gabriel was a rare step, but in line with the current right-wing government's stance against all those it accuses of having political agendas and unfairly tarnishing Israel.

Germany has also raised concerns with the Israeli government about its programme of settlement building in the West Bank and occupied East Jerusalem despite international concern.

Israel's housing ministry said on Friday that it planned to build a further 15,000 new settlement homes in East Jerusalem which is claimed by Palestinians as the capital of a future Palestinian state.

Saeb Erekat, the Palestinians' chief negotiator, said Israel's move was a systematic violation of international law and a "deliberate sabotage" of efforts to resume talks.

"All settlements in occupied Palestine are illegal under international law," he said in a statement. "Palestine will continue to resort to international bodies to hold Israel, the occupation power, accountable for its grave violations of international law throughout occupied Palestine."