The United States appears to have hit a dead end in its attempts to revive Middle East peace talks, a senior Palestinian official said on Tuesday, urging Israel to halt settlement building on occupied land to give U.S. diplomacy a chance of success.

The West Bank-based Palestinian Authority has demanded a full halt to Israeli settlement building in East Jerusalem and the West Bank before any resumption of negotiations suspended since December 2008.

Saeb Erekat, the chief Palestinian negotiator, said the Palestinians wanted U.S. guarantees that Israel would not issue more tenders to build on land where the Palestinians aim to establish a state, including East Jerusalem.

Israel must also cancel plans announced last month for more building in parts of Jerusalem it occupied, along with the West Bank in a 1967 war, Erekat added.

"This is what we expect," Erekat told Voice of Palestine radio.

"But it appears that all the consultations that have happened with the Israeli government and the American administration and other states have reached a dead end with Israeli positions insisting on a continuation of settlement."

Palestinian President Mahmoud Abbas met U.S. Consul General Daniel Rubinstein on Monday, Erekat added.

Erekat told Reuters Israeli Prime Minister Benjamin Netanyahu must choose between settlement building or peace.

"If Netanyahu responds to the demand for halting settlement, that would mean giving the international community and the United States the chance they deserve to try to create peace," he said.

Netanyahu, who met U.S. President Barack Obama in Washington last month, has yet to respond formally to a U.S. demand for confidence-building steps to try to persuade Palestinians to return to peace talks.

DEEP DIVISION

The Israeli newspaper Haaretz reported last week that Obama wanted Israel to freeze construction in East Jerusalem for four months in the hope such a step would bring the Palestinians back to full negotiations.

Underlining the deep division over Jerusalem, Israeli Foreign Minister Avigdor Lieberman said Israel would not agree to freeze building anywhere in the city. "Not in the west of the city and not in the east of the city, either for Jews or for Arabs," Lieberman, head of the far-right Yisrael Beitenu party, told Israel Radio.

Citing historical and Biblical links, Israel regards all of Jerusalem as its capital, a claim not recognised internationally. Palestinians want East Jerusalem as their capital.

Israeli settlements in the West Bank and East Jerusalem have expanded steadily since the start of the peace process in the early 1990s. The Palestinians say the settlements, considered illegal by major world powers, will prevent the establishment of a viable state.

Under U.S. pressure, Netanyahu, who heads a government dominated by pro-settler parties, including his own, imposed a 10-month construction freeze on West Bank settlement in November, but excluded East Jerusalem.

"It appears that Netanyahu is defying the entire international community, at the forefront of it the American administration, with his rejection of a settlement halt, which is obstructing the start of indirect negotiations," Erekat said.

Netanyahu has said his policies on Jerusalem mirror those followed by all Israeli governments since 1967 and he accused the Palestinians of setting new conditions for peace talks.