A three-member UN panel said private companies should stop working in the settlements if their work adversely affected the human rights of Palestinians, and urged member states to ensure companies respected human rights.
"Israel must cease settlement activities and provide adequate, prompt and effective remedy to the victims of violations of human rights," Christine Chanet, a French judge who led the UN inquiry, told a news conference.
The settlements contravened the Fourth Geneva Convention forbidding the transfer of civilian populations into occupied territory and could amount to war crimes that fall under the jurisdiction of the International Criminal Court, the United Nations report said.
"To transfer its own population into an occupied territory is prohibited because it is an obstacle to the exercise of the right to self-determination," Chanet said.
In December, the PLO accused Israel in a letter to the United Nations of planning to commit what it said were further war crimes by expanding Jewish settlements after Palestine won de facto UN recognition of statehood, and said Israel must be held accountable.
Israel has not cooperated with the probe set up by the Human Rights Council last March to examine the impact of settlements in the territory, including East Jerusalem. Israel says the forum has an inherent bias against it and defends its settlement policy by citing historical and Biblical links to the West Bank.
Israel's foreign ministry swiftly rejected the report as "counterproductive and unfortunate". The Palestine Liberation Organization welcomed its "principled and candid" findings.
"The only way to resolve all pending issues between Israel and the Palestinians, including the settlements issue, is through direct negotiations without pre-conditions. Counterproductive measures -- such as the report before us, will only hamper efforts to find a sustainable solution to the Israel-Palestinian conflict," Israel's Yigal Palmor said.
"The Human Rights Council has sadly distinguished itself by its systematically one-sided and biased approach towards Israel. This latest report is yet another unfortunate reminder of that."
But Hanan Ashrawi, a top PLO official told Reuters: "This is incredible. We are extremely heartened by this principled and candid assessment of Israeli violations...This report clearly states the Israel is not just violating the fourth Geneva Convention, but places Israel in liability to the Rome Statute under the jurisdiction of the ICC."
The independent UN investigators interviewed more than 50 people who came to Jordan in November to testify about confiscated land, damage to their livelihoods including olive trees, and violence by Jewish settlers, according to the report.
"The mission believes that the motivation behind this violence and the intimidation against the Palestinians as well as their properties is to drive the local populations away from their lands and allow the settlements to expand," it said.'Creeping annexation'
About 250 settlements in the West Bank, including East Jerusalem, have been established since 1967 and they hold an estimated 520,000 settlers, according to the UN report. The settlements impede Palestinian access to water and farm lands.
The settlements were "leading to a creeping annexation that prevents the establishment of a contiguous and viable Palestinian state and undermines the right of the Palestinian people to self-determination," it said.
Chanet said: "To maintain such a system of segregation you need strict police and army control. It means a lot of checkpoints, violation of freedom of movement, no access to natural resources, demolition of houses and sometimes even destroying the trees."
After the General Assembly upgraded the Palestinians status at the world body, Israel said it would build 3,000 more settler homes in the West Bank and East Jerusalem -- areas Palestinians wanted for a future state, along with the Gaza Strip.
The UN human rights inquiry said that the International Criminal Court had jurisdiction over the deportation or transfer by the occupying power of its own population into the territory.
Chanet, asked whether the violations constituted war crimes that could be tried at the Hague-based court, said: "These offenses are falling into the provision of article 8 of the ICC statutes. Article 8 of the ICC statute is in the chapter of war crimes, that is the answer."
GENEVA (Reuters) -- UN human rights investigators called on Israel on Thursday to halt settlement expansion and withdraw all half a million Jewish settlers from the occupied West Bank, saying that its practices could be subject to prosecution as possible war crimes.