JERUSALEM, Jan 22 (Reuters) - Israel condemned the Palestinians' top cleric on Sunday for reciting, at a meeting of the dominant U.S.-backed Fatah faction, a passage from Muslim scripture that called for the killing of Jews.

Preaching on Jan. 9 at a rally marking the 47th anniversary of Fatah's founding, Mufti of Jerusalem Mohammed Hussein read out a Hadith, or traditional text attributed to the Prophet Mohammad.

"The hour of judgment will not come until you fight the Jews," he said. "The Jew will hide behind the stone and behind the tree. The stone and the tree will cry, 'Oh Muslim, Oh Servant of God, this is a Jew behind me, come and kill him'."

The Palestinian Authority denied the sermon constituted a call to arms.

It remained unclear if comments from such a senior cleric would derail efforts to resume exploratory peace talks with Israel, which began this month after more than a year of deadlock over the expansion of Jewish settlements in the occupied West Bank.

Israeli Prime Minister Benjamin Netanyahu, who has argued peacemaking has been blighted by incitement against the Jewish state from some Palestinian officials, said of the mufti's sermon: "This is a very serious offence that all the countries of the world must condemn."

He said he had asked Israel's attorney-general to open a criminal investigation. The Justice Ministry had no immediate comment.

Interviewed by Reuters Television, Hussein described the Hadith as an end-of-times prophesy, not a political precept.

"There is nothing in my speech that calls for killing," he said. "I was speaking about my people, its steadfastness and its existence in this land until the hour (of resurrection)".

Video of the rally circulated by Palestinian Media Watch (PMW), an Israeli watchdog group, showed a man introducing the mufti by saying: "Our war with the descendants of the apes and pigs is a war of religion and faith. Long live Fatah!"

The Koran retells the Exodus story of some Jews rebelling against Moses after their deliverance from bondage, and says God punished them by turning them into pigs and apes.

Palestinian religious affairs minister Mahmoud al-Habash confirmed the details of the rally as they appeared in the PMW video but said: "Our political position remains unchanged. We believe in peace. He (Hussein) was simply quoting a Hadith that talks about destiny, about what could happen in the future."

Israel captured East Jerusalem, including two major mosques that are under the mufti's authority, in the 1967 Middle East war. Israel deems the entire city its capital, a status not recognised abroad, where there is widespread support for the Palestinians' demand to found a state with a capital in East Jerusalem.

On Netanyahu's orders, Israeli police last year detained for questioning two West Bank settler rabbis on suspicion they had encouraged the killing of Arabs. A Justice Ministry spokesman said a decision on prosecuting them was still pending.