Arab and Turkish foreign ministers on Saturday condemned Israel's plans to build 3,000 settler homes in east Jerusalem after the Palestinians won non-member observer status at the United Nations.

The ministers "condemned the Israeli decision to establish 3,000 housing units in East Jerusalem and the West Bank," according to a joint statement released at the end of the Turkish-Arab Cooperation Forum in Istanbul.

They called on the international community to exert all efforts to halt the Israeli settlement activities which they said "are illegal and contrary to (UN) Security Council decisions resolutions and international law."

Israel revealed plans to build the 3,000 new homes a day after the Palestinians' historic success at the United Nations on Thursday.

The UN General Assembly overwhelmingly backed a resolution on Thursday recognising Palestine as a non-member observer state, a move Palestinian leader Mahmud Abbas said was part of "a last chance" for a negotiated two-state solution.

Israel and the United States have both criticised the UN vote as an obstacle to efforts to reach an Israeli-Palestinian peace accord.

In opening remarks, Turkish Foreign Minister Ahmet Davutoglu called for an "independent Palestinian state" and urged the international community not to allow Israel to undermine peace efforts in the Middle East.

Davutoglu welcomed the upgrading of the Palestinians' status at the United Nations as a "significant step."

"Now is the time to restore permanent peace in the region," said Davutoglu, adding that the establishment of "an independent Palestinian state" was a precondition to achieving peace.

"We hope that the Palestinian flag will be hoisted at the United States with full member status," Davutoglu said.

He also criticised the Israeli aggression in Gaza which he said dragged the Middle East into new chaos. "Now is the time to show strong reactions to Israeli policies which undermine the peace process," he said.

Turkish Prime Minister Recep Tayyip Erdogan, addressing the forum, welcomed the UN vote about the Palestinians but said: "We must see and admit that Palestine is also a country under occupation despite the fact that it won observer status."

Erdogan, a vocal critic of Israeli aggression, branded Israel as a "terrorist state" and accused it of "ethnic cleansing" in the Gaza Strip, which was battered by air strikes last month.

He also called for Palestinian unity to form a "state with East Jerusalem as its capital".