Sweden will recognise the state of Palestine, becoming the first major European country to do so, centre-left prime minister Stefan Lofven has said.

During his inaugural address in parliament, Lofven said that the Israeli-Palestinian conflict "can only be solved with a two-state solution, negotiated with international law".

"A two-state solution requires mutual recognition and a will to peaceful coexistence. Sweden will therefore recognise the state of Palestine," he said.

The UN general assembly recognised in 2012 Palestine as a non member observer state, paving the way to a wider official recognition from European states. It also required an immediate stop to settlement construction in the West Bank and east Jerusalem.

The move came as the European Union harshly criticised Israel's plan to build 2,610 homes in Givat Hamatos, in East Jerusalem, saying it poses a threat to a two-state solution.

"This represents a further highly detrimental step that undermines prospects for a two-state solution and calls into question Israel's commitment to a peaceful negotiated settlement with the Palestinians," the European Union's External Action Service said in a statement.

"We stress that the future development of relations between the EU and Israel will depend on the latter's engagement towards a lasting peace based on a two-state solution."