All 14 other members of the Security Council backed the resolution, which had been endorsed by the Palestine Liberation Organisation.

It was the first veto exercised by the Obama administration which had promised better relations with the Muslim world.

A Palestinian official said the talks process would now be "re-assessed".

Washington was under pressure from Israel and Congress, which has a strong pro-Israel lobby, to use its veto.

It had placed enormous pressure on the Palestinians to withdraw the resolution and accept alternatives, but these were ultimately rejected.

While stating that it opposed new settlements, the administration argued that taking the issue to the UN would only complicate efforts to resume stalled negotiations between Israel and the Palestinians on a two-state peace deal.

"Unfortunately, this draft resolution risks hardening the positions of both sides," said the US Ambassador to the UN, Susan Rice.

The resolution, sponsored by at least 130 countries, declared Israeli settlements in Palestinian territories were illegal and a "major obstacle to the achievement of a just, lasting and comprehensive peace".

Speaking from Ramallah in the West Bank, PLO secretary general Yasser Abed Rabbo said the US veto was "unfortunate" and "affected the credibility of the US administration".