Israeli Prime Minister Benjamin Netanyahu, buoyed by new-found support from the Obama administration, urged the Palestinians to "get a grip" and drop their settlement freeze precondition for restarting talks suspended since December.
On a one-day Middle East visit on Saturday, Secretary of State Hillary Clinton endorsed Israel's view that settlement expansion in the occupied West Bank should not be a bar to resuming negotiations -- contradicting the Palestinian position.
Netanyahu has proposed limiting building for now to some 3,000 settler homes already approved by Israel in the West Bank. He does not regard building in occupied East Jerusalem, annexed in defiance of international opposition, as settlement.
U.S. President Barack Obama himself, after persuading Palestinian President Mahmoud Abbas in September to meet Netanyahu in New York, called only for "restraint" in settlement, not the "freeze" he had previously proposed.
Stung by Obama's about-face and Clinton's remarks, the Palestinians voiced their frustration.
"The negotiations are in a state of paralysis, and the result of Israel's intransigence and America's back-pedaling is that there is no hope of negotiations on the horizon," Abbas spokesman Nabil Abu Rdainah said.
He said the Palestinians were calling for the Arab League to formulate a "unified Palestinian-Arab position" on the stalled peace process.
Palestinian negotiator Saeb Erekat said it was a "critical moment" and insisted settlement must halt to revive peace moves.
"Pressuring Palestinians to make further concessions to accommodate Israeli intransigence is not the answer," he said.
Netanyahu told his cabinet that U.S. envoy George Mitchell would continue efforts on Sunday to revive negotiations.
"We hope very much that the Palestinians will get a grip and engage in the diplomatic process," Netanyahu said. "It is in the interests of Israel and the Palestinians."
Abbas faces intense domestic pressure from Hamas Islamists who control the Gaza Strip, and any compromise on settlements could hurt him politically in a run-up to Palestinian elections he has scheduled for January 24. Hamas has rejected holding a vote.
Some 500,000 Israelis live in the West Bank and East Jerusalem alongside 2.8 million Palestinians. Israel captured the territories in a 1967 war with its Arab neighbors. Palestinians say settlements could deny them a viable state.
Netanyahu's coalition, including pro-settler groups, does not believe Abbas is strong enough to deliver Israeli security in any deal. Some analysts see Netanyahu's cooperation with Obama's demand for a resumption of talks on establishing a Palestinian state as intended mainly to ensure U.S. support against Iran.
Palestinians warn that popular frustration with the failure to produce statehood deal could spill over into an upsurge in violence, even if few have appetite for a broad new uprising.
George Giacaman, a political analyst at Birzeit University in the West Bank said, "The Palestinian Authority is weak and has not been achieving any results.
"I believe we are at a dangerous stage. With no credible political process, this could create a political vacuum that might lead to violence."
Nadir Saeed, at the same institution, said Abbas had little option but to try and keep talking with Israel and the Americans, adding: "It is no better for him to come back to his public empty-handed.
"(Abbas) has built his career on the idea of negotiations. He cannot credibly back away."
(Additional reporting by Ali Sawafta and Erika Solomon in Ramallah and Tom Perry and Ori Lewis in Jerusalem; Editing by Alastair Macdonald)