SHEFARAM, ISRAEL - Israeli Foreign Minister Avigdor Lieberman during a rare visit to an Israeli-Arab town on Thursday assailed a U.S.-led campaign to stop settlement building, calling it 'disproportionate'.

Lieberman took a tougher tone than others in Israel's right-wing government in response to Washington's demands to stop building in West Bank land seized in a 1967 war.

The ultranationalist cited world concerns about North Korea's latest missile tests and a disputed election in Iran, a country accused of developing a nuclear programme for military purposes, though Tehran says it to generate electricity.

'Have matters not become disproportionate',' Lieberman said. I think we should put things back in perspective.'

'We cannot agree to choke these same people with our own hands by not allowing them simply normal life as everywhere else,' Lieberman said of the settlers, who number about 500,000 in a territory that also is home to 3 million Palestinians.

Lieberman, who is a settler, also took issue with German Chancellor Angela Merkel's remarks on Thursday to the Bundestag that 'there must be a stop' to settlement building.

Washington's calls for a total halt to settlement building in land Palestinians seek for a state has opened the most serious rift in U.S.-Israeli relations in a decade.

Palestinian President Mahmoud Abbas also insists on a settlement freeze before peace talks can resume.

Israeli Defence Minister Ehud Barak suggested on Wednesday that Israel could consider a moratorium in construction in the settlements, but on condition that Arab states were persuaded to normalise ties with the Jewish state.

Accused by some Israeli Arabs of being a racist for questioning their loyalty to the Jewish state, Lieberman visited an unusual bastion of support in a Druse neighbourhood in Shefaram, a large Arab town in northern Israel's Galilee.

Unlike Muslims and most Christian Arab citizens, most of the Druse serve in Israel's military.

Most Israeli Arabs, about a fifth of the population, are descended from Palestinians who stayed in what is now Israel when hundreds of thousands of others fled or were driven out during a war over the Jewish state's creation.

Lieberman promised to help the Druse resolve a local government debt and create more jobs despite state budget cuts.

His party, Yisrael Beitenu, became Israel's third largest in a February election, due in part to support from the Druse community.