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By Ori Lewis
JERUSALEM (Reuters) - Israel warned the Palestinians on Monday that declaring a state without concluding a peace agreement would lead to Israeli counter-measures that could include annexation of more of the occupied West Bank.
"If the Palestinians take such a unilateral line, Israel should also consider ... passing a law to annex some of the settlements," Environment Minister Gilad Erdan, a close ally of Prime Minister Benjamin Netanyahu, told Israel Radio.
Israeli Foreign Minister Avigdor Lieberman, speaking to reporters, declined to specify what action Israel might take.
But he said: "It is clear any such step by the Palestinians would not pass without an Israeli response."
Without setting a timeframe, Palestinian officials said on Sunday the Palestinians planned to go to the U.N. Security Council in an effort to secure international support for an independent state in the West Bank and Gaza Strip.
Palestinians attributed the move to frustration at the lack of progress in peace talks, which have been stalled for a year. Palestinian President Mahmoud Abbas has said negotiations cannot resume until Israel halts settlement expansion.
U.S. senators visiting the Middle East said Washington would veto a Palestinian declaration of statehood in the United Nations Security Council. They said it would go nowhere and urged Arab states to stop it. "It would be D.O.A. - dead on arrival," said Democratic Party Senator Ted Kaufman (DE) "It's a waste of time."
Diplomats deferred comment, saying it was not immediately obvious by what means the Palestinians might pursue a declaration of statehood, or how international law might apply.
Recent examples suggest they might take the same route as Israel's founders in 1947 and simply seek U.N. support for a resolution calling for statehood, which is what East Timor did to become the first new state of the 21st century in 2002.
Or they might declare independence without going to the U.N. as Kosovo did when it became the world's newest state in 2008, knowing it could not win Security Council endorsement because of a threatened Russian veto, but would receive quick recognition by most NATO and European Union governments.
The Palestinian remarks on possible unilateral steps prompted a warning from Netanyahu. He said in a speech on Sunday only peace talks with Israel would secure a Palestinian state.
"There is no substitute for negotiations between Israel and the Palestinian Authority and any unilateral path will only unravel the framework of agreements between us and will only bring unilateral steps from Israel's side," Netanyahu said.
Senior Palestinian negotiator Saeb Erekat said that the aim of the initiative was not to declare statehood but was meant to preserve the two-state option and to formalise international support for the nation the Palestinians want to establish.
"Heading to the Security Council to issue a resolution recognising an independent Palestinian state ... differs entirely from a unilateral declaration of a Palestinian state. The PLO is not proposing the option of declaring a state unilaterally," Erekat said in a statement.
Erdan, in the radio interview, discussed other sanctions open to Israel, which captured the West Bank in a 1967 war and annexed some of the territory along with Arab East Jerusalem.
"Everything is open ... it could begin at stopping the transfer of money that the Israeli government currently transfers to the Palestinian Authority," he said, referring to tax payments Israel collects on the Authority's behalf under interim peace deals.
Erdan said Israel might also consider tightening recently loosened travel restrictions on Palestinians in the West Bank.
(Writing by Jeffrey Heller, Additional reporting by Allyn Fisher-Ilan and Douglas Hamilton and Tom Perry in Ramallah, Editing by Diana Abdallah)