Israel’s Foreign Minister Gideon Saar has warned his country will retaliate if the UK imposes sanctions against it over the potential expansion of settlements in the West Bank.

Addressing Parliament for the first time as foreign secretary, Ed Miliband said he would introduce a “comprehensive reset” of policy on Israel “in the coming weeks”.

He said the government would examine how to stop UK companies “financing, constructing or advertising new settlements” in the occupied West Bank.

Responding, Gideon Saar told Hebrew-language news website Ynet: “If Britain acts against Israel, Israel will act against Britain.”

“If they act, I think they will be making a big mistake,” he said.

Last month, Israel opened up tenders for the construction of some 1,200 settlement homes in the so-called E1 area – a strategically important area east of Jerusalem. The plans have drawn widespread international condemnation.

The development would in effect divide the West Bank in two and isolate East Jerusalem.

Miliband said the plans are “illegal under international law” and called them “the crossing of a red line, as it cuts through the heart of the West Bank and risks making a Palestinian state unviable”.

UK Prime Minister Andy Burnham also warned that Israel’s statement about the E1 area could “imperil or end” the two-state solution in the Middle East.

All settlements are illegal under international law and, under global pressure, Israel held off for decades on plans to build in the area.

The “two-state solution”, which has received international backing, proposes an independent Palestinian state in the West Bank and Gaza, with East Jerusalem as its capital, that would exist alongside Israel.

Israel rejects a two-state solution. The Palestinian Authority backs a two-state solution but Hamas does not because it is opposed to the existence of Israel.