* Israel refused to cooperate with U.N. investigation
* U.N. report-Israeli settlements are "creeping annexation"
* Says settlements prevent a viable Palestinian state
* Israel rejects report, while top PLO official welcomes it
GENEVA, Jan 31 (Reuters) - U.N. 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.
A three-member U.N. 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 U.N. 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 (ICC), 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.
All U.N. member states must comply with their duty under international law on the settlements, she said. "We have highlighted states' responsibility because the facts we denounce are known. The problem is nobody is doing anything about it."
U.N. Secretary-General Ban Ki-moon reacted to the inquiry's findings by repeating his position that "all settlement activity in the occupied Palestinian territory, including East Jerusalem, is illegal under international law," according to a statement.
In December, the Palestinians accused Israel in a letter to the United Nations of planning to commit what they said were additional war crimes by expanding Jewish settlements after the Palestinians won de facto U.N. 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." Palestinians welcomed the report, saying it vindicated their struggle against Israel.
"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.
But Hanan Ashrawi, a senior PLO official, told Reuters in Ramallah: "This is incredible. We are extremely heartened by this principled and candid assessment of Israeli violations."
The independent U.N. 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.
About 250 settlements in the West Bank, including East Jerusalem, have been established since the 1967 Middle East war and they hold an estimated 520,000 settlers, according to the U.N. report. The settlements impede Palestinian access to water and farmland.
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 firms working in the territories must uphold human rights. France's Veolia, which built Jerusalem's light rail linking the western side of the city to the eastern side annexed by Israel after the 1967 war, won a case brought against it in a Nanterre court, whose ruling that it had not violated the Geneva Conventions is now on appeal, she said.
After the General Assembly upgraded the Palestinians' status at the world body, Israel said it would build 3,000 additional settler homes in the West Bank and East Jerusalem - areas Palestinians want for a future state, along with the Gaza Strip.
"I think that maybe it will help in the negotiation just to see that now, and especially when Palestine has been recognised as a state, things might change. Maybe, we hope. And now there is a new government in Israel," Chanet said.
"So things are moving. So we hope that our report will be in the middle of this movement."