BRUSSELS, May 14 (Reuters/Sebastian Moffett and Justyna Pawlak) - Israeli settlement building and curbs on economic development in the occupied West Bank risk wrecking Palestinian hopes of creating their own state, the European Union said on Monday.

Clearly frustrated by long-stalled peace talks, European Union foreign ministers issued a detailed statement, accusing Israel of accelerating settlement construction and tightening its control over East Jerusalem at the expense of Palestinians.

Israel condemned the report as biased, saying it would do nothing to help promote peace in the region.

Negotiations between Israel and the Palestinians broke down in late 2010 in a dispute over Jewish settlement building in the West Bank, and Palestinians say talks cannot resume unless such construction is frozen.

Israel says there should be no pre-conditions for talks and last year intensified its settlement program after the Palestinians won a seat at the U.N. cultural agency, UNESCO, as part of its campaign to seek broad, statehood recognition.

The EU expresses deep concern about developments on the ground, which threaten to make a two-state solution impossible, EU foreign ministers said in a statement after a meeting.

The bloc also criticized what it said were worsening conditions for the Palestinians living in Area C -- the 60 percent of the West Bank which is under Israeli control and where most Jewish settlements are located.

EU ministers said Israel was forcing some Bedouin communities to leave their land in Area C, adding that economic life for Palestinians in the territory had to be improved.

The EU calls upon Israel to meet its obligations regarding the living conditions of the Palestinian population in Area C, including ... halting forced transfer of population and demolition of Palestinian housing and infrastructure, it said.

EU diplomats in Jerusalem have been incensed by Israel's destruction of projects in Area C that had received EU backing.

According to data collected by international aid groups, at least 62 structures funded by the EU and its member states were demolished by Israel in 2011 and 2012, including water cisterns, animal shelters, and agricultural and residential buildings.

In addition, over 110 structures are at risk after receiving demolition or stop-work orders from Israeli authorities, said the so-called Displacement Working Group, which joins together NGOs and international bodies operating in the West Bank.

Israel says it issues demolition orders for projects that failed to receive planning permission. The EU said the Israeli bureaucracy had to be simplified.

The EU will continue to provide financial assistance for Palestinian development in Area C and expects such investment to be protected for future use, the statement said.

The Israeli Foreign Ministry issued a sharp riposte.

The (EU) conclusions ... include a long list of claims and criticism which are based on a partial, biased and one-sided depiction of realities on the ground. Such a public presentation does not contribute to advancing the process, it said.

Israel retains military authority and full control over building and planning in Area C. Up to 70 percent of it is off-limits for Palestinians, classified as Israeli settlement areas, firing zones, or nature reserves, NGOs say.

In the remaining 30 percent there are restrictions that reduce the possibility for Palestinians to get building permits.

The EU also reiterated its commitment to the Jewish state's security on Monday and said it was appalled by rocket attacks from Gaza, which is run by Palestinian Hamas Islamists.

Europe is the largest donor to the Palestinian Authority, which has limited self-rule in the West Bank. However, Europe's leverage is limited, with its aid program far outweighed by Washington's economic and military support for Israel.

The Israeli armed forces have destroyed 49.14 million euros ($65.08 million) worth of EU-funded development projects in the West Bank and Gaza Strip over the last 10 years, according to European Commission figures seen by Reuters in April.

A tenth of the damage occurred during Israel's bombardment and incursion into the Hamas-controlled Gaza strip in 2008-9. Another large proportion coincided with the second Palestinian intifada, or uprising, against Israel last decade.

(Additional reporting by Allyn Fisher-Ilan; Editing by Crispian Balmer/Mark Heinrich)