Saeb Erekat (L) says it is a "moment of truth " for President Abbas
Palestinians might have to abandon the goal of an independent state if Israel continues to expand Jewish settlements, the chief Palestinian negotiator said.
At a news conference in the West Bank, Saeb Erekat said it was a "moment of truth" for President Mahmoud Abbas.
He said it might be time for Mr Abbas to "tell the truth" that a two-state solution "is no longer an option".
But Israel rejects a one-state solution as a demographic time-bomb that would make Jews a minority in the country.
It may be time for President Abbas to "tell his people the truth, that with the continuation of settlement activities, the two-state solution is no longer an option", Mr Erekat said in Ramallah.
His comments came as the US Secretary of State, Hillary Clinton, sought to defuse Arab anger after she praised Israel at the weekend for making "unprecedented" concessions on settlement-building in the occupied West Bank.
Speaking in Cairo after talks with Egyptian President Hosni Mubarak, Mrs Clinton reiterated Washington's call for an end to Israeli settlement activity in the West Bank.
She had earlier praised the Israeli offer to temporarily limit construction in West Bank settlements to 3,000 additional housing units.
But Mr Erekat dismissed the offer, saying it only opened the door to more settlements in the next two years.
"Israel has the choice, settlements or peace," he said.
Mr Erekat said Palestinians had made a mistake in the last round of talks by agreeing to negotiate without insisting that Israel settlement building be stopped, but he said this time would be different.
The alternative left for Palestinians was to "refocus their attention on the one-state solution where Muslims, Christians and Jews can live as equals", he said.
He suggested that President Abbas might not stand for re-election if the two-state solution were no longer an option, the BBC's Bethany Bell reports from Ramallah.
In its push to restart peace talks, US President Barack Obama's administration initially demanded a complete freeze on Israeli settlement building.
But Israel has refused a total halt, particularly in East Jerusalem, where the Palestinians want to locate the capital of a future state.
In September Washington changed tack, pushing for a resumption of negotiations and saying it demanded no preconditions for the talks - a move which disappointed the Palestinians.
After meeting Mrs Clinton, Egyptian Foreign Minister Ahmed Aboul Gheit appeared to have softened his stance on the settlements issue.
Despite backing the Palestinians' demand for a total freeze last week, he called for a resumption of talks.
"We have to concentrate on the end game and we must not waste time adhering to this issue or that as a start for the negotiations," he said.