Israel is building in settlements in the occupied West Bank and East Jerusalem - seized by Israel in the 1967 Middle East war and occupied for nearly 50 years - where Palestinians want to establish their state and capital.

"As before, I see no reasonable alternative to the goal of a two-state solution," Merkel told reporters before holding talks with Palestinian President Mahmoud Abbas in Berlin.

"Both the Israeli and the Palestinian people have the right to live in peace and security and none of the other options can deliver that credibly," she said.

Merkel's comments jar with past remarks by U.S. President Donald Trump, who has expressed some ambivalence about a two-state solution. Trump has, though, recently invited Palestinian President Mahmoud Abbas to visit.

The German chancellor said the building in settlements posed "an impediment to the resolution of the conflict".

"I am very concerned about developments in the West Bank, which are leading to an erosion of the basis for a two-state solution," Merkel said.

A meeting between the governments of Germany and Israel that was scheduled to take place in May has been canceled amid rising frustration in Berlin with settlement activity in the Israeli-occupied West Bank.

German governments have made strong relations with Israel a top priority ever since World War Two, going to great lengths to make amends for the killing of six million Jews by the Nazis.

But relations have grown tense in recent years as Germany questioned Israeli Prime Minister Benjamin Netanyahu's commitment to a two-state solution with the Palestinians.

On Thursday, talks between the United States and Israel ended without agreement over limiting future construction on land the Palestinians want for a state.

The four days of high-level meetings marked the latest step by Trump's aides aimed at opening the way to renewed peace diplomacy between Israel and the Palestinians, despite skepticism in the United States and the Middle East over the chances for success.

Peace talks between Israel and the Palestinians have been frozen since 2014 and settlements are one of the most heated issues. Palestinians want the West Bank and East Jerusalem for their own state, along with the Gaza Strip.

Most countries consider Israeli settlements to be illegal. Israel disagrees, citing historical and political links to the land, as well as security interests.

REUTERS