Israel's state prosecution on Thursday defended the government-announced moratorium on new construction projects in West Bank settlements, saying that the move serves the country's diplomatic interests.

The decision is "meant to cement Israel's commitment to the peace process and its hope that it would reignite the direct negotiations with the Palestinians, local news service Ynet quoted an official with the State Prosecutor's Office as telling the Supreme Court.

The argument was presented in response to petitions filed by a local group against the 10-month policy, which has been subject to bitter criticism and resistance from right-wing politicians and settlers since Prime Minister Benjamin Netanyahu declared it late last month.

Commenting on claims that the ban harms the financial interests of certain settlers, the official was quoted as saying that the government will soon establish a compensation scheme and that settlers can sue for damages.

"The overall diplomatic benefits outweigh any individual damage, " stressed the official.

As to accusations that the public was not given enough time to sound their voices before the government decreed the ban, the state prosecution cited concerns that numbers of construction projects would have been launched during the public debate in attempts to create new realities on the ground.

Such a surge of construction activities "will irrevocably hinder efforts to resume negotiations," said the State Prosecutor's Office.

In the strongest sign to date of the enormous opposition to the construction freeze, thousands of settlers and their supporters demonstrated in Jerusalem on Wednesday night, urging the government to rescind the decision.

However, the Netanyahu administration has vowed to fully enforce the policy and urged opponents to abide by law.

Meanwhile, the Palestinians called the moratorium insufficient, as it excludes some 3,000 settlement homes already approved and construction activities in East Jerusalem.

The Palestinian National Authority has stressed that before Israel completely halts construction in both the West Bank and East Jerusalem, it will not resume the peace talks that has broken down for over a year.