BERLIN, Jan 17 (Reuters) - German Foreign Minister Frank-Walter Steinmeier said on Thursday that Israel should freeze the building of settlements if it wanted to achieve peace with the Palestinians.

In the text of a speech delivered at a Bertelsmann Foundation event, Steinmeier listed three key points for dialogue and peace in the region -- better economic conditions for the Palestinians, better security and a freeze on settlements.

"The settlements are a very complicated and delicate question for both sides. But I believe that if we are serious about a two-state solution, then the building of new and the extension of existing settlements in the West Bank and East Jerusalem must be stopped," he said according to the text.

"I realise that a freeze (on settlements) is painful for Israel, especially around Jerusalem. Nevertheless, this is a question of credibility for the entire negotiation process: if territorial issues are being debated, we can't have steps taken that cement ownership."

Top government officials in Berlin are usually careful to avoid any impression of criticising Israel because of Germany's Nazi past and the comments by Steinmeier were some of his strongest to date on the settlements issue.

They came as violence escalated between Israel and Palestinians, endangering renewed peace talks spurred by last week's visit by U.S. President George W. Bush.

During the visit, Bush urged Israel to end its "occupation" of the West Bank and pushed for a peace treaty to be signed within a year to create a Palestinian state.

Close to half a million Jews live on West Bank land seized by Israel in 1967, including Arab East Jerusalem.

Pressed by Washington, Israeli Prime Minister Ehud Olmert has ordered an effective halt to new construction in settlements.

But Israel does not view building on West Bank land it has annexed to Jerusalem as settlements and Olmert has not called off plans to build at a disputed site between East Jerusalem and Bethlehem. (Writing by Noah Barkin; Editing by Richard Balmforth)

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