A Palestinian unity deal with the Islamist Hamas movement must be supported, European Commission chief Jose Manuel Barroso told an Israeli security conference on Sunday.

His remarks came just days after a Palestinian unity government, comprised of political independents but backed by Hamas, was sworn in -- a move welcomed by the international community but rejected by Israel as a major stumbling block to peace.

"In the interest of a future peace deal and of a legitimate and representative government, intra-Palestinian reconciliation... should be supported," Barroso told delegates at a conference in the coastal city of Herzliya.

Any Palestinian government should uphold the principle of non-violence, be committed to a two-state solution and a negotiated settlement of the conflict, which would imply accepting existing agreements as well as recognising Israel's right to exist, he said.

When news of the surprise reconciliation agreement between Palestinian leaders in the West Bank and Gaza emerged in late April, Israel immediately broke off US-led peace talks, saying it would never negotiate with any government backed by Hamas.

"The Palestinian unity government with backing from the Hamas terrorist organisation is a Palestinian step against peace and in favour of terrorism," Israeli Prime Minister Benjamin Netanyahu said on Tuesday.

"No European country would be prepared to accept a terrorist organisation as part of its government," he said.

Barroso also called on Israel and the Palestinians to find the "political courage" to take decisive steps "to bet on peace."

"The status quo may seem politically safer in the short term but it cannot deliver any long term gains," he said.

"Leadership is about making possible what is necessary, and peace is necessary in the region. Security for Israel and a state for the Palestinians are moral imperatives for the international community."

Also speaking at the Herzliya conference, Israeli Economy Minister Naftali Bennett, who heads the far-right Jewish Home Party, called anew for a tough response to the Palestinian government formation.

Israel should hit back by "imposing its sovereignty over Judea-Samaria (the West Bank)," he said. "I call on the prime minister to take the first step towards annexation."

But Finance Minister Yair Lapid warned that his centrist Yesh Atid party would quit the coalition government and bring down the cabinet if any such plan went ahead.

Also on a visit to Gaza Sunday, Robert Serry, UN special coordinator for the Middle East peace process, voiced the UN's support for the Palestinian unity government.

"The formation of the government of national consensus is a first step and opportunity to address the serious political, security, humanitarian and economic challenges ahead," Serry said in a statement.

He also called for lifting the blockade of the Gaza Strip and allowing the free movement of the new Palestinian ministers between Gaza and the West Bank.