The European Union has warned that the prospect of a peaceful and viable solution to the Israeli-Palestinian conflict, involving two states side by side, is in jeopardy because of Israeli actions.

In a sharply critical statement issued in Brussels on Monday, the EU foreign affairs council warned that the acceleration of settlement construction, evictions and house demolitions in East Jerusalem, settler violence and provocations, and worsening conditions for Palestinians in most of the West Bank "threaten to make a two-state solution impossible".

It reiterated that Israeli settlements in the West Bank and East Jerusalem are illegal under international law, saying that the EU will not recognise any changes to the pre-1967 borders without both parties' agreement. Jerusalem must be the future capital of both states, it said.

Israel swiftly rejected the statement, saying its "long list of claims and criticisms [were] based on a partial, biased and one-sided depiction of realities on the ground".

The statement called on Israel to meet its obligations to the Palestinian population living in "Area C", the 61% of the West Bank which is under full Israeli security control.

The EU said living conditions were deteriorating, and that Israel must halt the forced transfer of Bedouin communities and demolition of housing and infrastructure, make building permits easier to obtain and ensure access to water.

Aid organisations working in the West Bank separately reported on Monday that 62 EU-funded projects such as housing, water cisterns and farm buildings had been demolished by Israeli security forces last year and a further 110 were at risk.

The affected structures were financed by Britain, Ireland, France, the Netherlands, Poland and the European commission.

The Israeli defence ministry is to seek court approval this week for the demolition of 12 communities for whom the UK government funded water cisterns and sanitation systems. The largely cave-dwelling communities are sited in an area Israel has designated a military zone.

The EU statement welcomed a recent exchange of letters between the Israeli and Palestinian leaders, in which both sides said they wanted to resume negotiations. It also briefly referred to Israel's "legitimate security needs" and condemned rocket fire from Gaza.