US Secretary of State John Kerry on Tuesday blamed approval of Jewish settlements in East Jerusalem for derailing peace talks with Palestinians, a charge that pricked Israeli officials and sent aides into damage control.

The Israeli government announced a major expansion of settlement construction in the West Bank last month, just as Washington was scrambling for a way to get the two sides to extend US-sponsored peace talks beyond an April 29 deadline.

While Kerry blamed intransigence on both sides, he told US lawmakers that 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 testified to the Senate Foreign Relations Committee.

Israeli-Palestinian peace talks have teetered on the brink of collapse, with Washington fighting an uphill battle to get the two sides to agree to a framework proposal to extend the negotiations to the year's end.

A Palestinian spokesman last month blamed the impasse on Israel's West Bank settlement plans.

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

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

"I hear that the (building) program in Jerusalem was defined as 'poof.' 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 fairminded 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," State Department spokeswoman Jen Psaki said on Twitter.

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

Kerry was also drawn into a heated exchange with Senator John McCain, who declared the peace talks "finished."

While Kerry insisted that Israelis and Palestinians were keen on continuing the process, McCain cut in: "It is stopped," he told Kerry. "Recognize reality."

Kerry refused to see it that way.

"My hope is the parties will find a way back. We're working with them to try to do so," Kerry said.

He stressed there has been "a narrowing of differences" between the two sides, although he would not elaborate.

- Kerry on defensive -

Meanwhile, the two sides met US envoy Martin Indyk late on Monday and are to see him again on Wednesday, a Palestinian source told AFP.

Kerry faced a grilling over US foreign policy on several fronts, particularly Syria, where strongman Bashar al-Assad's forces have made gains against rebel positions in recent days in the three-year civil war that has left 150,000 people dead.

"We have no policy, from what I can tell, other than... allowing people to kill each other off" and Washington failing to honor its commitments to support opposition groups, Republican Senator Bob Corker said.

Kerry argued that the Obama administration was focused intently on resolving the Syria crisis.

And while he conceded Assad forces have made gains, "I think there's a capacity to change Assad's calculation, and so does the president," Kerry said.

"The key is, how do you get the parties to understand there isn't a military solution?"