The United States on Tuesday abandoned its effort to persuade Israel to freeze construction of Jewish settlements, officials said, dealing a blow to efforts to revive Israeli-Palestinian peace talks.?

Direct talks brokered by Washington were relaunched in September but broke down over the issue of settlements built on captured land that Palestinians seek for a state.

"We reached the conclusion this is not the time to renew direct negotiation by renewing the moratorium," a senior US dipomat told reporters in Israel.

Palestinians have said they would not engage in any direct talks while Israelis build on territory seized in the 1967 Middle East War.

In Washington, officials said the United States was weighing a return to indirect talks following its failure to revive the direct negotiations.

Two officials, who spoke on condition of anonymity, gave three reasons why the Obama administration decided to abandon the effort.

They said that while Israel was willing to extend the moratorium it was not willing to freeze construction in East Jerusalem, something Palestinian officials had demanded as they want that part of the city as capital of their state.

"(Extending) the moratorium did not close the gap between the two parties," said one US official.

Second, the officials said that unless they made sufficient progress during a temporary Israeli extension of the moratorium they could end up in the same place in three months still struggling to keep the peace process alive.

"We had to be prepared to think that substantial progress could be made in 90 days," said the same US official, suggesting there was enough uncertainty about this that it did not seem worth proceeding.

Finally, they said that there were some concerns about the size of the incentives the United States offered Israel - which Israeli sources said included 20 F-35 stealth fighters worth $3 billion - for only a temporary extension.

The officials said one possibility they would explore with senior Israeli and Palestinian officials who are expected to visit Washington - possibly within the next week - would be resuming indirect peace talks.

Despite the impasse, Israeli and Palestinian negotiators will head to Washington next week to consult on how to move ahead.

"In the coming days and weeks we will engage both sides on the core substantive issues at stake in this conflict," a US official said.

The US admission represented a significant setback for US President Barack Obama, who had hoped to have a peace deal signed by the end of next year.

There was no official comment from either the Israeli or Palestinian side.

Senior members of Prime Minister Benjamin Netanyahu's pro-settler ruling coalition had criticised the demands for a settlement moratorium as tantamount to setting preconditions for peace talks and urged him to reject any US offer.

Palestinian President Mahmoud Abbas suggested in a television interview on Friday he may seek to dissolve the Palestinian government, a limited form of self-rule agreed in an interim deal in 1993, if a deal for statehood could not be achieved.

Saeb Erekat, the chief Palestinian negotiator, said a week ago that peace talks were near collapse, and blamed Israel.

Palestinian officials have said they may seek to declare statehood unilaterally in the occupied West Bank if negotiations with Israel foundered.

Three Latin American nations, Argentina, Brazil and Uruguay declared recognition of a Palestinian state at the weekend, drawing Israeli condemnation.

"Such a declaration today only harms the peace process," Israel's Deputy Foreign Minister Danny Ayalon said, charging it encouraged Palestinians to toughen their stance in negotiations.