A top European Union official warned on Wednesday that both Israel and the Palestinians would have a "price to pay" if U.S.-led peace talks collapse.

Speaking to reporters in Jerusalem, Lars Faaborg-Andersen, the EU's ambassador to Israel, also rebuffed charges by Prime Minister Benjamin Netanyahu that Europe was showing a pro-Palestinian bias.

Israel has arrested an al-Qaida-run militant cell in annexed east Jerusalem which was planning to bomb the U.S. embassy, a spokesman for the prime minister's office said on Wednesday.

The U.S. State Department said it had been in touch with the Israeli authorities about the alleged plot but was not able to corroborate it independently.

Israeli President Shimon Peres privately opposes Prime Minister Benjamin Netanyahu's insistence that Palestinians recognize Israel as a Jewish state, saying it obstructs peace talks, local newspaper Israel Hayom said Wednesday.

"In conversations held by Peres in the past weeks with senior diplomatic and political figures, he explained that this insistence by Netanyahu was 'unnecessary,' as he put it, since it could derail the peace negotiations," the paper wrote.

Two Palestinian members of Islamic Jihad were killed in an Israeli air raid in the Gaza Strip overnight, witnesses and medical sources said Wednesday.

The two victims, Ahmad al Zaaneen, 21, and Mohammed al Zaaneen, 23, died when the car they were travelling in was hit near Beit Hanoun in the northern Gaza Strip, the sources said.

A jihadist group based in Egypt's Sinai claimed responsibility Tuesday for firing rockets a day earlier at Israel's Red Sea resort of Eilat, calling the Jewish state the Muslim world's top enemy.

Al-Qaeda-inspired Ansar Beit al-Maqdis accused Israel of pressuring Cairo to wage a "war on Islam and Muslims in Egypt, particularly in the Sinai... to protect (Israeli) security."

Israeli Prime Minister Benjamin Netanyahu said Tuesday that Iran's atomic drive "will be stopped," a day after a nuclear deal bringing in sanctions relief for Tehran took effect.

"Iran's military nuclear program must be stopped, and Iran's military nuclear program will be stopped," Netanyahu told reporters in Jerusalem, without elaborating.

Israeli Prime Minister Benjamin Netanyahu on Tuesday threatened to teach Gaza's ruling Hamas movement a lesson "very soon" following a surge in militant rocket attacks on the Jewish state.

"We foil terrorist attacks when we identify that they are in the making and we respond against those who attack us," Netanyahu told reporters in Jerusalem at a joint press conference with his Canadian counterpart Stephen Harper.

Israeli troops crossed on Tuesday the barbed wire in al-Wazzani hills and deployed at the river's eastern bank, the state-run National News Agency reported.

According to NNA, the Israeli infantry unit was composed of 25 soldiers.

Canadian Prime Minister Stephen Harper was shouted down by Arab lawmakers at the Israeli Knesset on Monday in a speech which won him a standing ovation from Jewish MPs.

Arab Israeli MP Ahmed Tibi hurled mostly inaudible comments at Harper before walking out with another lawmaker as the Canadian premier delivered a 20-minute speech which was markedly pro-Israel on his first-ever visit to the Jewish state.

At least one rocket struck the outskirts of Israel's southern Red Sea resort of Eilat on Monday, a security source told Agence France Presse.

"At least one rocket was fired at Eilat and they found the remains on the outskirts of the city," he said, speaking on condition of anonymity, adding the searches were continuing.