* Tells Israeli envoy settlements illegal, obstacle to peace
* Says mulling measures against Israel, not recalling envoy (Recasts with envoy meeting, Fabius/Hague statement, details)
By John Irish
PARIS, Dec 3 (Reuters) - France summoned Israel's envoy in Paris on Monday to tell him that the decision to expand settlement building in occupied territories was illegal and an "obstacle" to reviving peace talks with the Palestinians.
A French foreign ministry official had earlier brushed aside reports that Paris could recall its own envoy in Jerusalem and said Paris was looking at other ways of putting pressure on Prime Minister Benjamin Netanyahu.
France and Britain, both U.N. Security Council members, have condemned Israel's plans to build more settlements in the occupied West Bank and East Jerusalem, saying it would jeopardise international confidence in Israel's desire to make peace with the Palestinians.
"The minister's chief of staff ... told him of France's serious concerns," the foreign ministry said in a statement.
"He reminded the Israeli ambassador that France condemned the building of any kind of Israeli settlements. Settlements are illegal under international law, destroy confidence in reviving dialogue and constitute an obstacle to a fair peace based on a two-state solution."
Israel says it has a historical claim to land in the West Bank and to all of Jerusalem. Israel captured the West Bank and East Jerusalem in a 1967 war. Palestinians want East Jerusalem as the capital of a future state.
Netanyahu has dismissed world condemnation of his latest settlement plans, which were announced on Friday just hours after the United Nations voted overwhelming to upgrade the Palestinians' diplomatic status.
France broke from its main Western allies by voting in favour of the upgrade.
Israel said on Friday it would build thousands of new settler homes, including in a wedge zone between Jerusalem and the West Bank, known as E1, which Washington considers especially sensitive.
Diplomatic sources said both London and Paris were considering the unprecedented step of recalling their ambassadors to Tel Aviv, but both countries signalled there was still room for manoeuvre to avoid a deep crisis with Israel.
"There are other ways in which we can express our disapproval," a French foreign ministry official told Reuters, declining to say what other measures were being considered.
Foreign ministry spokesman Philippe Lalliot said the Middle East peace process would be discussed at a European Union foreign minister's meeting on Dec. 10.
In a joint article published in French weekly newspaper Le Journal du Dimanche, Foreign Minister Laurent Fabius and his British counterpart William Hague urged the United States to quickly push for new negotiations between Israelis.
"What is essential is that the two parties enter negotiations without pre-conditions," the ministers said.
"Creating obstacles to talks will only delay peace. Both sides must in particular hold back from making decisions that are incompatible with dialogue and would call into question the viability of a two-state solution." (Reporting by John Irish; Editing by Mark Heinrich)