France on Wednesday condemned Israel's decision to step up settlement building on occupied land and to withhold tax funds from the Palestinians to punish them for joining UN cultural body UNESCO.

"France condemns the decision to accelerate the construction of several thousand homes in settlements in east Jerusalem and surroundings," foreign ministry spokesman Bernard Valero told journalists.

Israeli Prime Minister Benjamin Netanyahu's inner cabinet decided on Tuesday to speed up settlements on occupied Palestinian land, a day after UNESCO's general assembly voted Palestine in as a full member.

"Settlement building in the West Bank as well as in east Jerusalem is illegal in international law and is a threat to the two-state solution," Valero said.

Israel also decided to freeze the transfer of customs duties levied on goods destined for Palestinian markets that transit through Israeli ports, which constitute a large percentage of the Palestinian budget.

Valero called on Israel to continue paying the funds owed to the Palestinians.

"Freezing them would be counter to Israel's international undertakings and its legal obligations. It would also threaten the progress made by the Palestinian Authority in building up Palestinian institutions on the ground."

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