Israel's strategy in negotiations could force the Palestinians to abandon their goal of a two-state solution, a top Palestinian negotiator says.
Ahmed Qurei says they may instead seek a binational solution, that is a single state for Israelis and Palestinians in Israel, the West Bank and Gaza.
Israel fears such a this would spell the end of the Jewish majority state.
Israel captured the West Bank and Gaza in 1967. Its negotiators have always resisted full withdrawal from them.
Mr Qurei told a meeting of the ruling Fatah faction in the West Bank that the Palestinian leadership had been working to establish a Palestinian state within the 1967 borders.
"If Israel continues to reject this and prevent us from achieve our choice, we will call for the alternative solution for the Palestinian people and their leadership - that is a single binationalist state," he said.
Correspondents say chances are slim of achieving a two-state peace deal before US President George W Bush leaves office next January, a deadline put forward by Washington and signed up to by both sides.
Chief advocate
Prime Minister Ehud Olmert plans to resign in the coming weeks as he fights multiple corruption allegations against him.
The revived peace process spearheaded by him and Palestinian leader Mahmoud Abbas has seen regular bi-lateral meetings but little visible progress.
Sticking points include the future status of Israeli-occupied east Jerusalem and Israeli settlement blocs in the West Bank.
Internal Palestinian strife has also complicated matters, with the Hamas movement which opposes a permanent two-state deal continuing control of the Gaza Strip in defiance of the Fatah-controlled Palestinian Authority.
Mr Qurei has for years been one of the most vocal Palestinian advocates of the plan of setting up an independent Palestinian state alongside Israel, and observers say his statement could be a significant change of heart.
But Israel, with US backing, retains considerable military and diplomatic superiority over the Palestinians, making a binational state a distant prospect.
The US got behind the two-state formula in 2002, but subsequently it also supported Israel's goal of retaining land beyond the 1967 borders where Israel has settled large populations of its citizens.
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