Israeli Prime Minister Benjamin Netanyahu ordered ministers to limit contact with their Palestinian counterparts as the Arab League blamed his government Wednesday for the "dangerous stalemate" in US-brokered peace talks.

The moves came a day after US Secretary of State John Kerry, who kick-started the talks in July after a nearly three-year hiatus, blamed Israel for derailing the process by announcing new settlement construction.

"In response to the Palestinian violation of their commitments under peace talks... Israel government ministers have been told to refrain from meeting their Palestinian counterparts," an Israeli official told AFP.

Palestinian labour minister Ahmad Majdalani downplayed the significance of the move.

"There are no (regular) meetings organised between Palestinian and Israeli ministers, apart from the finance ministers," he told AFP.

A Palestinian government source told AFP the Israelis might move to block tax revenue collected by Israel on the Palestinian Authority's behalf.

And an Israeli official confirmed that the government "envisaged withholding part of the amounts remitted... each month in reaction to the unilateral Palestinian moves."

The official added that the "important sums" given to Palestinian prisoners held by Israel and to their families each month by the PA is a "form of supporting terrorism."

"We envisage holding back the equivalent of that" unspecified amount, the source said.

Approximately 5,000 Palestinians are held in Israeli jails.

The PA pays prisoners a monthly "salary" that runs from $400 (290 euros) for those serving less than three years to more than $3,000 for sentences above 30 years.

Israel briefly withheld tax revenues in December 2012 to punish the Palestinians for their successful drive for observer state status at the United Nations.

-- 'Israel wholly responsible' --

Washington denounced Netanyahu's order as "unfortunate".

"We believe that cooperation between Israel and the Palestinian Authority has provided benefits to both sides," State Department spokeswoman Jen Psaki said.

"We continue to urge both sides to take steps that contribute to a conducive environment for peace."

Arab foreign ministers gathered in Cairo with Palestinian president Mahmud Abbas said Israel was "wholly responsible for the dangerous stalemate" in the US-brokered talks which are scheduled to wrap up on April 29.

Arab League chief Nabil al-Arabi accused Israel of dragging its feet, telling reporters: "Gaining time is a strategic objective for Israel."

On Tuesday, Kerry said Israel's April 1 approval of Jewish settlements in east Jerusalem ignited the latest crisis in the negotiations, a charge that left Israeli officials bristling.

While he cited intransigence on both sides, Kerry said a delayed Israeli plan to release several Palestinian prisoners as part of a good faith effort was sabotaged by the settlements move.

"In the afternoon, when they were about to maybe get there, 700 settlement units were announced in Jerusalem and, poof, that was sort of the moment," he told the Senate Foreign Relations Committee.

At the end of March, Israel refused to release a final batch of long-serving Palestinian prisoners as agreed under the talks, and at the same time reissued tenders for 708 settler homes in annexed Arab east Jerusalem.

The Palestinians responded by applying to accede to 15 international treaties, despite their previous commitment to refrain from such action during the nine months of talks.

Peace talks have since teetered on the brink of collapse, with Washington fighting an uphill battle to get the sides to agree to a framework proposal to continue the negotiations beyond April 29 to the end of the year.

- 'No apology for building' -

Kerry's remarks were met with a crisp response from Israeli Economy Minister Naftali Bennett, who heads the far-right Jewish Home party.

"Israel will never apologise for building in Jerusalem," Bennett said.

"For many years (the Palestinians) tried with explosions and bombs to stop us being in the eternal capital of the Jewish people. It will not happen."

The State Department, perhaps assessing the potential impact Kerry's comments could have in the Middle East, rushed to explain that the secretary of state was fair-minded in apportioning blame.

"John Kerry was again crystal clear today that both sides have taken unhelpful steps and at no point has he engaged in a blame game," spokeswoman Psaki said on Twitter.

"He even singled out by name Prime Minister Netanyahu for having made courageous decisions throughout (the) process."

The two sides were to meet US envoy Martin Indyk Wednesday for the second time this week, with another meeting expected on Thursday, a Palestinian source told AFP.

"Despite all, we are committed, as Palestinians and Arabs, to the negotiation process and the efforts exerted by Kerry in order to find a way out of this crisis," Palestinian foreign minister Riyad al-Malki said in Cairo.

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