Israeli settlement building "runs contrary to peace", William Hague said after calling for an end to new construction in talks with the country's defence minister.
The Foreign Secretary said he raised the UK's "serious concern" over the announcement of 400 new units in the West Bank during a "constructive" meeting with Ehud Barak yesterday.
Amid British fears that unrest in Libya and elsewhere could further damage the stalled Middle East process, he called on both sides to return to negotiations.
Mr Hague also condemned last weekend's murder of five Israelis in Itamar and an arms shipment bound for Gaza believed to have come from Iran.
"I had a constructive wide-ranging meeting with Defence Minister Barak today," he said last night.
"I underlined that the UK unreservedly condemns the murder of the family in Itamar on March 11.
"On the Middle East peace process, the UK has been clear that both sides should urgently return to negotiations, based on clear parameters supported by the international community, in order to resolve final status issues.
"Together with France and Germany, we have set out our views on what those parameters should be.
"I reiterated this position today and expressed our serious concern over the recent announcement of 400 new housing units in the West Bank. Continued settlements run contrary to peace."
He went on: "We also discussed Iran and the recent seizure of arms allegedly bound for Gaza. If, as the evidence suggests, this was indeed an arms shipment from Iran, and following last week's exposure of the Nato seizure of Iranian arms destined for the Taliban, it would be another flagrant and unacceptable breach of UN Security Council Resolutions by Iran and further evidence of Iran's intention to disrupt stability in the region."