German Chancellor Angela Merkel said on Thursday that Germany and Israel were in disagreement over Israel's settlements building policy, as she hosted Israeli Prime Minister Benjamin Netanyahu for talks.

"On the question of settlements, we are agreed that we are not agreed," Merkel said a joint press conference with Netanyahu in Berlin.

Netanyahu's visit came amid mounting international calls for Israel to drop plans to build 3,000 new settler homes in a highly contentious strip of the occupied West Bank near Jerusalem.

He announced the move in reaction to the upgrading of Palestine to non-member observer state at the UN and has refused to go back on the decision despite international condemnation.

Speaking alongside Merkel, he said that "I have not changed the policy. This is an old policy."

"I think the root cause of the problem is not the settlements. I hope that we can engage at least part of the Palestinian people in a discussion about mutual co-existence, about mutual peace," he added.

Merkel said Israel's security was "part of the fundamental principle of the German state" and that the two leaders had spoken "about how we can improve the security of Israel."

"We believe that work towards a two-state solution must be continued," she said. "In our view, we need to try and return to negotiations and unilateral measures should be avoided."

AFP