Israel Tuesday decried London's decision to upgrade the Palestinian representation in Britain to a rank just below embassy, dpa reported.
The upgrade is from General Delegation, the third-highest rank, to Mission, the second highest.
Palestinian Foreign Minister Riad Malki welcomed it as a "good" step, which however was "not enough."
He called for recognition of a Palestinian state in the borders of 1967. Israel captured the West Bank from Jordan and Gaza from Egypt in the Six-Day War of that year.
British Foreign Secretary William Hague announced London's decision Monday, ahead of a meeting with visiting Palestinian President Mahmoud Abbas, scheduled for Tuesday. Abbas is also due to have talks with Prime Minister David Cameron.
The Palestinian General Delegation in London, which refers to itself as an embassy, is headed by Ambassador Manuel Sarkis Hassassian.
Britain follows in the footsteps of France, Spain and Ireland, which in recent months upgraded the Palestinian general delegations in their capitals, to missions.
Israeli Foreign Ministry spokesman Yigal Palmor charged the "unhelpful measure" would only strengthen the Palestinians' rejection of direct peace negotiations, without preconditions, with the right- leaning government of Prime Minister Benjamin Netanyahu.
"They are refusing to renew direct talks, and at the same time they are getting these gestures that are encouraging them in their current policy," he told the German Press Agency dpa.
In London, Abbas thanked Hague for upgrading the status of the Palestinian Delegation in London and said the step was "appreciated" and a "contribution to peace."
"I hope the time will come when we have a fully-fledged embassy in London," said Abbas in a statement to journalists.
Hague said Britain had "joined many others" in upgrading the level of the Palestinian representation to that of a mission. He described it as a "positive step in our relations."
But, answering questions later, he said the mission upgrade was "not a recognition of a Palestinian state. It does not have the attributes of recognition."
However, he hoped that full recognition would come with the successful negotiation of a two-state solution.
Israel is concerned about its worsening international standing, as the peace process remains frozen, with the Palestinians making direct talks conditional on a freeze of Israeli construction in the occupied West Bank and East Jerusalem.
Abbas' West Bank-based leadership is suspicious of Netanyahu's intentions and has said it will not hold lengthy negotiations without his government just so that it can enjoy increased international legitimacy, while settlement construction continues.
Netanyahu has said he cannot and will not halt construction in areas which Israeli consensus holds should become part of Israel under a future peace deal, and has repeatedly urged Abbas to drop his precondition.
In the absence of negotiations, Abbas' Palestinian Authority pushes to upgrade its international status, asking countries to recognize a Palestinian state and to upgrade the Palestinian missions to their capitals.
A number of South American states have already done so.
Former Dutch prime minister Dries van Agt said in an interview Tuesday he expected the first European country to recognize Palestine to be Norway, which is not a member of the EU. He told Haaretz he had reasons to believe Spain would be the first EU country to follow.
Netanyahu, in what critics have already blasted as an empty attempt to prove to the Israeli public he has a foreign policy, plans to present a new peace initiative this spring, offering the Palestinians a state with provisional borders, with sovereignty in parts of the West Bank where they currently enjoy autonomy.
Abbas rejects a state with provisional borders.
Netanyahu is expected nonetheless to make the offer in an address in Washington in May, either to Congress or to the annual conference of the US' largest pro-Israel lobby - the American Israel Public Affairs Committee.
Malki said Abbas had asked Hague for the upgrade during a visit to the region last year by the British foreign secretary, who had told the Palestinian leader he would "consider" the request.
"We are looking for Britain and for European countries to recognize the Palestinian state," he told Voice of Palestine Radio, adding the Palestinian Authority continued to work on that.
In much of Africa, Eastern Europe and Asia, Palestinian representations already enjoy full embassy status.
Israel: London upgrade of Palestinian mission unhelpful
Israel Tuesday decried London's decision to upgrade the Palestinian representation in Britain to a rank just below embassy, dpa reported.