By Kylie MacLellan

LONDON (Reuters) - British Prime Minister Theresa May will raise the issue of Israeli settlements in occupied territory with Israeli leader Benjamin Netanyahu in London on Monday but their talks will focus on boosting trade as Britain leaves the European Union.

May's spokeswoman said she would also reiterate her support for the Iran nuclear deal, which Prime Minister Netanyahu and U.S. President Donald Trump strongly oppose.

Despite the points of difference, May has warmly praised Israel since she took office last year in the aftermath of the Brexit referendum.

Last week she became the first foreign leader to meet Trump since his inauguration and EU allies fear Britain could indulge him by changing its stance on Israel and Iran in the hope of a post-Brexit trade deal.

She will however set out Britain's concerns over an increase in Israeli settlement activity in occupied lands on which the Palestinians hope to create independent state, the spokeswoman said.

"I would expect the prime minister to set out the government’s position that we think the continued increase in settlement activity undermines trust," she said.

"Our focus is on how do we make a two-state solution with an Israel that is safe from terrorism and a Palestinian state that is viable and sovereign, work?"

In December, Britain voted for a U.N. Security Council resolution demanding an end to Israeli settlement-building in land captured in the 1967 Middle East War. In a break with traditional policy, then U.S. President Barack Obama refused to veto the resolution.

But May has also shown herself to be close to Israel - scolding then U.S. Secretary of State John Kerry for a speech criticizing Israeli policy.

Last month Britain said it had reservations about a French-organised Middle East peace conference in Paris and did not back the final communique by 70 countries which reaffirmed that only a two-state solution could resolve the Israeli-Palestinian conflict. Its stance angered many EU members.

Netanyahu has been encouraged by the election of Trump, who has signaled he could be more accommodating toward the settlements than his predecessor. Since Trump took office, Israel has announced plans to build more.

Trump's team has also spoken of moving the U.S. Embassy from Tel Aviv to Jerusalem, Israel's self-proclaimed capital and a holy city at the heart of the Israeli-Palestinian conflict. Britain has said it does not intend to follow suit.

Speaking at a West Bank settlement on Thursday, Netanyahu said he would raise the issue of Iran with May.

"I am going to speak with her about the changing reality in our region and the need to adopt new, different and common approaches towards the huge threats in our region, primarily the threat from Iran," Netanyahu said.

May's spokeswoman said Britain believed the Iran nuclear deal was "vitally important for regional security".

(Additional reporting by William James in London and Jeffrey Heller in Jerusalem; Editing by Stephen Addison and Angus MacSwan)