RIYADH, Feb 21 (Reuters) - Saudi Arabia voiced regret on Monday over a US veto of a UN resolution condemning Israeli settlements on occupied land, in a rare criticism of Washington by its close Arab ally.

The council (of ministers) expressed regret on behalf of the kingdom over America's use of its veto right against the Palestinian-Arab resolution condemning Israeli settlements on Palestinian lands, said a cabinet statement carried by the state news agency SPA.

The United States on Friday vetoed a draft UN Security Council resolution which described Israeli settlements as illegal and urged the Jewish state to immediately and completely halt all settlement activities.

Saudi Arabia, the world's largest oil exporter, is a close ally of the United States.

The kingdom, the birthplace of Islam, sees itself as a defender of Palestinian rights and in 2002 proposed a peace initiative that calls for full Arab recognition of Israel if it gives up lands occupied in a 1967 war and accepts a solution for Palestinian refugees.

The first veto to be cast by President Barack Obama's administration came after appeals by Washington failed to persuade Palestinian leaders to withdraw the draft or accept a non-binding motion.

US-brokered peace talks collapsed last year after Israel refused to extend a moratorium on West Bank settlements.

The Palestinians say continued building flouts the internationally backed peace plan that will allow them to create a viable, contiguous state on the land, occupied by Israel in a 1967 war.

Israel says this is an excuse for avoiding peace talks and a precondition never demanded before during 17 years of negotiation, which has so far produced no agreement.