* Palestinians say they own tracts seized by Israel
* Long-standing plans for settlement at site
* U.S. urges Israel to reverse decision
* Spokesman for Palestinian leader condemns Israeli move
By Jeffrey Heller
JERUSALEM, Aug 31 (Reuters) - Israel announced on Sunday a land appropriation in the occupied West Bank that an anti-settlement group termed the biggest in 30 years, drawing Palestinian condemnation and a U.S. rebuke.
Some 400 hectares (988 acres) in the Etzion Jewish settlement bloc near Bethlehem were declared "state land, on the instructions of the political echelon" by the military-run Civil Administration.
"We urge the government of Israel to reverse this decision," a State Department official said in Washington, calling the move "counterproductive" to efforts to achieve a two-state solution between Israel and the Palestinians.
Israel Radio said the step was taken in response to the kidnapping and killing of three Jewish teens by Hamas militants in the area in June.
Tensions stoked by the incident quickly spread to Israel's border with Gaza, which is controlled by Hamas, and the two sides engaged in a seven-week war that ended on Tuesday with an Egyptian-brokered ceasefire.
The notice published on Sunday by the Israeli military gave no reason for the land appropriation decision.
Peace Now, which opposes Israeli settlement activities in the West Bank, territory the Palestinians seek for a state, said the appropriation was meant to turn a site where 10 families now live adjacent to a Jewish seminary into a permanent settlement.
Construction of a major settlement at the location, known as "Gevaot", has been mooted by Israel since 2000. Last year, the government invited bids for the building of 1,000 housing units at the site.
Peace Now said the land seizure was the largest announced by Israel in the West Bank since the 1980s and that anyone with ownership claims had 45 days to appeal. A local Palestinian mayor said Palestinians owned the tracts and harvested olive trees on them.
Israel has come under intense international criticism over its settlement activities, which most countries regard as illegal under international law and a major obstacle to the creation of a viable Palestinian state in any future peace deal.
Nabil Abu Rdainah, a spokesman for Western-backed Palestinian President Mahmoud Abbas, called on Israel to cancel the appropriation. "This decision will lead to more instability. This will only inflame the situation after the war in Gaza," Abu Rdainah said.
Israeli Prime Minister Benjamin Netanyahu broke off U.S.-brokered peace talks with Abbas in April after the Palestinian leader reached a reconciliation deal with Hamas, the Islamist movement that dominates the Gaza Strip.
In a series of remarks after an open-ended ceasefire halted the Gaza war, Netanyahu repeated his position that Abbas would have to sever his alliance with Hamas for a peace process with Israel to resume.
The administration of President Barack Obama, who has been at odds with Netanyahu over settlements since taking office in 2009, pushed back against the land decision. It was the latest point of contention between Washington and its top Middle East ally Israel, which also differ over Iran nuclear talks.
"We have long made clear our opposition to continued settlement activity," said the State Department official, who declined to be identified.
"This announcement, like every other settlement announcement Israel makes, planning step they approve and construction tender they issue, is counterproductive to Israel's stated goal of a negotiated two-state solution with the Palestinians," the official said.
After the collapse of the last round of U.S.-brokered peace talks, U.S. officials cited settlement construction as one of the main reasons for the breakdown, while also faulting the Palestinians for signing a series of international treaties and conventions.
Israel has said construction at Gevaot would not constitute the establishment of a new settlement because the site is officially designated a neighbourhood of an existing one, Alon Shvut, several km (miles) down the road.
Some 500,000 Israelis live among 2.4 million Palestinians in the West Bank and East Jerusalem, territory that the Jewish state captured in the 1967 Middle East war. (Reporting by Jeffrey Heller in Jerusalem, Matt Spetalnick in Washington and Ali Sawafta in Ramallah; Editing by Mark Heinrich and Andrea Ricci)