The Palestinian prime minister, Salam Fayyad, warned today that a "moment of reckoning" was approaching as Israel and the Palestinian Authority prepare to embark this week on their first direct negotiations for 20 months.

Setting out his second-year plans to build the institutions and framework of a Palestinian state, due to be completed in 12 months, Fayyad said the talks "can and must" succeed or the chances of a two-state solution to the conflict would fade.

"Every day that this conflict is not resolved there are more facts on the ground that make a two-state solution less likely," he told a press conference in Ramallah. The international community had a vested interest in the success of the talks, he added. "It has invested heavily in this – not only economically, but morally and politically."

Talks between the Israeli prime minister, Binyamin Netanyahu, and the Palestinian president, Mahmoud Abbas, hosted in Washington by President Barack Obama, are scheduled for Thursday following a dinner to be attended by King Abdullah of Jordan, the Egyptian president, Hosni Mubarak, and Tony Blair, the envoy of the Middle East Quartet.

Expectations of a successful outcome are low among both Israelis and Palestinians despite the US setting a 12-month deadline for a comprehensive agreement covering all issues, including borders, refugees and the future of Jerusalem, which both sides want as their capital.

Fayyad expressed scepticism about Netanyahu's commitment to the creation of a Palestinian state on terms the Palestinians could accept.

"What kind of state does Mr Netanyahu have in mind when he says 'Palestinian state'?" Fayyad asked. "I believe, without wishing to prejudge what will happen in the next few days, the next few weeks, we are approaching that moment of reckoning."

The authority issued a report, optimistically entitled Home Stretch to Freedom, detailing its achievements over the past year in implementing measures designed to prepare for statehood and setting out detailed targets for the next 12 months.

"Around the middle of next year, the authority will have accomplished a critical mass of positive change on the ground. That's the goal," the prime minister said.

Plans for the next 12 months include strengthening the justice system, building a network of prisons, reinforcing anti-corruption measures, modernising health and education provision, empowering women and reconstructing or building airports in the West Bank and Gaza.

The authority was also determined to "pursue a path of fiscal consolidation with a view to substantially reducing our reliance on foreign aid," Fayyad said.

But, he added, a Palestinian state depended on a political process "producing what is required – namely ending the Israeli occupation that began in 1967. What we're doing on the ground reinforces the political process. We will have dealt with scepticism that the Palestinian people are capable of governing themselves. We will be ready to take care of the needs of our people when the occupation comes to an end."

He would not be drawn on whether the Palestinians would unilaterally declare a state if political negotiations fail. "I'm not ready to speculate what will happen if it doesn't work – because it can."

• This article was amended on 31 August 2010. An editing error caused a sentence in the original to read: "Setting out his second-year plans to build the institutions and framework of a Palestinian state – which the US wants complete in 12 months – Fayyad said the talks 'can and must' succeed ..." This has been corrected.