Prime Minister Jacinda Ardern says Israel's "encroachment, settlements and evictions" are getting in the way of a two-state solution with Palestinians.
Ardern's comments come as fighting continues between Israel and Hamas, the group that governs the Gaza Strip, a territory considered to be occupied by Israel, however the extent of self-rule has led some to describe it as a de facto independent state.
As of Tuesday, at least 212 people, including 61 children, had been killed in Gaza since the latest violence began a week ago, according to Gaza's health ministry. Israel had reported 10 dead, including two children.
New Zealand does not officially recognise Palestine as a state and has Hamas listed as a terrorist group. However, New Zealand does believe in the 'two-state solution', which envisions an independent State of Palestine alongside the State of Israel.
"In recognising the two-state solution, in recognising the right of Palestinians to security, to a stable home, and the right of Israel to exist, I think we are supporting the outcomes that much of the international community seeks," Ardern said on Monday.
"We currently do not have that for either side, but particularly in what has instigated some of this, that threat of eviction of Palestinians from their homes has become a trigger for a devastating conflict that is just moving us further and further away from a two-state solution."
The latest escalation in violence was partly sparked by Israel's plans to evict residents from the Sheikh Jarrah neighbourhood in occupied East Jerusalem to make way for Israeli settlers. Palestinians regard East Jerusalem as the capital of the future Palestinian state.
However, in 2017, the United States under former President Donald Trump formally recognised Jerusalem as Israel's capital. The US Embassy officially relocated to Jerusalem in 2018. The current Joe Biden administration is yet to reverse Trump's actions.
In 2017, Ardern said New Zealand would not be bullied on the international stage, after the US warned it would be "taking names" on which United Nations member states voted against them on the status of Jerusalem.
Ardern said on Monday she would "stand in defence" of New Zealand's position.
"We take a very firm view here - and we have consistently over the last two years, where of course there's been much debate sparked by the positioning of the United States - we have stood firmly on our view that we need to give Palestinians that security that they will have a consistent home, that they will feel secure in that home, and some of the encroachment, settlements and evictions move us further away from that.
"I've visited the region and the area. It felt to me even at that time, and this was several years ago, that we were very far away from having co-existence between Palestinians and Israelis, and yet it is in everyone's interest that we find a path in order to achieve that.
"What we're seeing at the moment is devastating - absolutely devastating."
The Ministry of Foreign Affairs and Trade (MFAT) released a statement on Sunday expressing "grave concern" on behalf of New Zealand at the escalation of violence in Israel and the Occupied Palestinian Territories.
"Aotearoa New Zealand remains steadfast in its belief that the seemingly intractable Israeli-Palestinian conflict can be resolved, and that the two-state solution is the only basis to achieve sustainable peace."
It came after Israel destroyed al-Jalaa tower in Gaza, a 12-storey building housing the offices of media outlets including the Associated Press (AP) and broadcaster Al-Jazeera. The Israeli military said the building "contained military assets" of Hamas.
Foreign Affairs Minister Nanaia Mahuta said last week the launching of rockets towards Israel by Hamas is "unacceptable" and must stop.
"At the same time any response from Israel should be restrained and must avoid civilian casualties. All sides have a responsibility to de-escalate, stop the violence and prevent further suffering and loss of life."
Around 4000 people turned out in 10 centres across New Zealand on Saturday in support of Palestinians. Palestine Solidarity Network Aotearoa said another protest is planned for this weekend.
The White House has announced that US President Biden called for a ceasefire in Gaza, when speaking to Israeli Prime Minister Benjamin Netanyahu, during a phone call.
Biden "reiterated his firm support for Israel's right to defend itself against indiscriminate rocket attacks" but "welcomed efforts to address inter-communal violence and to bring calm to Jerusalem".
Biden will not talk to Hamas because the US has also listed it a terrorist group. Gaza has been governed by Hamas since 2007. The US does not recognise the State of Palestine, but accepts the Palestinian Authority, led by Mahmoud Abbas, as representing the people.