(Adds background, detail of Auschwitz documents)
By Allyn Fisher-Ilan
BERLIN, Aug 27 (Reuters) - German Chancellor Angela Merkel on Thursday raised the pressure on Israel to freeze its settlement building programme in occupied territory and to resume the peace process with the Palestinians.
"We must make progress in the peace process...and a stopping of the settlement (building) is very important," Merkel said at a joint news conference with Israeli Prime Minister Benjamin Netanyahu in the German capital.
"Time is of the essence," she said.
Palestinian President Mahmoud Abbas has said he will only restart talks with Israel if Israel freezes Jewish settlement construction in the West Bank.
Israel has so far resisted U.S. President Barack Obama’s calls to stop building settlements to enable talks to resume.
About half a million Israelis live in settlements built in the West Bank and East Jerusalem in territory captured by Israeli forces in the 1967 Middle East War. The international community considers them to be illegal and Palestinians say they undermine their aspirations for their own state on the land.
Merkel’s stance chimes with the positions of EU states and the United States, but German politicians have traditionally refrained from criticising Israel, aware of an obligation towards the Jewish state after the Nazi Holocaust.
Netanyahu, a right-wing leader in office since March, has pledged not to build any new settlements but wants to enable what he calls "natural growth" of existing enclaves.
He reiterated he was open to talks with the Palestinians.
"I hope that in a month or two we can relaunch negotiations," he said.
He denied there was an agreement on a temporary stop to construction.
"These rumours are baseless there is no decision or agreement. There is an attempt to narrow the differences. But reports of agreement are simply not true," he said.
Merkel also said that Iran, whose president has said he wants to wipe Israel off the map, could face new sanctions in the energy and financial sectors if it failed to show a willingness to negotiate on its disputed nuclear programme.
"If there is no positive answer by September we will have to consider further measures," she said.
Obama has given Iran until September to take up a six-powers offer of talks on trade benefits if it shelves nuclear enrichment or face harsher penalties.
Western powers suspect Iran’s activities are aimed at developing a nuclear bomb but Iran says its programme is aimed at civil nuclear energy.
In a poignant ceremony earlier, German newspaper Bild gave Netanyahu a portfolio of 29 plans from the Auschwitz death camp discovered last year.
The documents include architects’ drawings of rooms including one market "Gaskammer", or gas chamber and are believed to have been found when a Berlin flat was cleaned out.
Bild Editor Kai Diekmann said there could never be a real normalisation of German-Israeli relations after the Holocaust.
"These plans remind us of a crime that with the passing of time seems ever more incomprehensible," Diekmann said, adding they were the "original blueprints for the most inhumane project in mankind ... the plans of hell".
(Writing by Madeline Chambers; Editing by Angus MacSwan)