* Kerry's remarks "intolerable", Netanyahu confidant says
* Boycott warnings have touched a nerve in Israel
* Kerry trying to reach framework Israeli-Palestinian deal
U.S. Secretary of State John Kerry is holding a gun to Israel's head in peace talks with the Palestinians by warning it could face international isolation if negotiations failed, a senior Israeli cabinet minister said on Sunday.
The remarks by Strategic Affairs Minister Yuval Steinitz, who is close to Prime Minister Benjamin Netanyahu, followed recent accusations by Israel's defence minister that Kerry was being "messianic" in his pursuit of a peace deal.
At a Munich security forum on Saturday, Kerry touched a nerve in Israel by pointing to "an increasing de-legitimisation" campaign building up against it internationally and "talk of boycotts" if the Israeli-Palestinian conflict did not end.
"Are we all going to be better with all of that?" asked Kerry, who is seeking a framework deal soon that will set a path toward a final accord on peace and Palestinian statehood.
Steinitz seized on the top U.S. diplomat's remarks as a threat against Israel that would only encourage the Palestinians to harden their positions in the six-month-old negotiations, which have shown few signs of progress.
"The things ... Kerry said are hurtful, they are unfair and they are intolerable," Steinitz told reporters.
"Israel cannot be expected to negotiate with a gun to its head when we are discussing the matters which are most critical to our national interests."
State Department spokeswoman Jen Psaki, in an emailed statement, said Kerry remained staunchly opposed to any boycott of Israel and was simply describing "previously stated facts about what is at stake for both sides" if peacemaking failed.
"Secretary Kerry has always expected opposition and difficult moments in the process, but he also expects all parties to accurately portray his record and statements," she said.
Netanyahu, in public remarks at the weekly meeting of his cabinet, was more guarded than Steinitz - making no direct mention of Kerry.
But, calling any attempts to impose a boycott "immoral and unjustified", Netanyahu said: "No pressure will cause me to forfeit the State of Israel's vital interests, chiefly the security of its citizens."
Netanyahu is facing pressure from another direction - ultranationalists within his coalition government - to oppose any evacuation of Jewish settlements from Israeli-occupied land Palestinians seek for a future state.
Most countries view those enclaves as illegal, a position Israel disputes.
Moderate members of Netanyahu's government have warned of catastrophe if the right-wing leader walks away from the table.
Israeli chief peace negotiator Tzipi Livni has described the negotiations as "the wall stopping a wave" of economic boycotts. And she has cautioned that Israel could face the sort of isolation imposed on South Africa during years of apartheid.
Companies in Israel's largest economic partner, the European Union, have already started to signal their concern.
A large Dutch pension fund, PGGM, said last month it is was divesting from five Israeli banks because of their business dealings with settlements in the West Bank and East Jerusalem, territory Israel captured in the 1967 Middle East war.
The issue has also grabbed headlines over a multi-million-dollar sponsorship deal between actress Scarlett Johansson and SodaStream, an Israeli firm operating in the West Bank.
She announced on Thursday she had quit as a global ambassador for Oxfam, which had called Johansson's association with SodaStream incompatible with her role for the charity.