The UN Middle East peace envoy on Monday singled out Israel's settlement building for criticism as he highlighted deadlocked efforts to bring Israelis and Palestinians into direct talks.

"Provocations continue to damage confidence," special envoy Robert Serry told a UN Security Council meeting on the Middle East.

"In particular, Israel continues to engage in settlement activity, including in highly sensitive areas, and demolitions of Palestinian structures are ongoing."

Israel stepped up approvals of new settlements and froze tax and customs payments to the Palestinian Authority which was ordered after Palestine was accepted as a member of UNESCO last month.

About $100 million dollars a month is being withheld, according to the UN envoy. Palestinian Authority Foreign Minister Riyad al-Malki said earlier that the authority has called on UN Secretary General Ban Ki-moon to intervene and secure the release of the funds.

Serry said the payments, collected by Israel, amount to about two thirds of the Palestinian Authority's annual income and that its "state-building gains" and buildup of security forces could be undermined.

"We must de-escalate this situation. In addition to acting on its settlement obligations, Israel should heed the calls of the secretary general (Ban Ki-moon) and other international leaders to unfreeze transfers to the Palestinian Authority," Serry said.

Serry also told the council that the weekly average of attacks by settlers on Palestinians in the occupied territories had increased by 40 percent in 2011 against 2010 and by 165 percent against 2009.

The envoy said that "more effective steps" are needed to stop the illicit trafficking of arms and ammunition into the Hamas-run Gaza strip as rocket and mortar attacks also threaten new tensions.

Serry stressed the urgent need for progress, warning that "without a credible political path forward, accompanied by more far-reaching steps on the ground, the viability of the Palestinian Authority and its statebuilding agenda – and, I fear, of the two State solution itself – cannot be taken for granted."