Israel has built heavily on occupied land in the West Bank and Jerusalem
Israel has offered a peace deal to the Palestinians which would annex 7.3% of the West Bank and keep the largest settlements, Israeli reports say.
In return the Palestinians would be given land equivalent to 5.4% of the West Bank in the Negev desert, the Israeli newspaper Haaretz reported.
Palestinian officials confirmed that such a plan had been put forward, but called it totally unacceptable.
The two sides have been in peace talks sponsored by the US since November.
Israel wants a new border similar to the route of the barrier it is currently building in and around the West Bank, Haaretz reports.
The proposed deal also covers Palestinian refugees and security arrangements, as well as the future of Gaza, Haaretz says, but not the issue of East Jerusalem and the ring of settlements around it.
On Monday, a delicate truce over Gaza's border was shaken when unidentified Palestinian militants fired a rocket which fell into an open area in the Israeli town of Sderot.
No-one was injured. Israeli Defence Minister Ehud Barak ordered crossings into the Hamas-controlled territory to be closed on Tuesday.
A spokesman for Palestinian leader Mahmoud Abbas said a proposed 92.7%-7.3% split was nothing new - it had been presented by Israel earlier in the year, he said.
"The only subject that was discussed seriously was the borders but we never reached an agreement. The gap is still as wide as ever," Abu Rudeineh told the BBC.
"This plan is totally unacceptable because we insisted to the Israelis that the border can only be on the basis of 1967," he said.
About half a million Israeli settlers live among 2.5 million Palestinians in the West Bank and East Jerusalem, land that was occupied by Israel in the 1967 war.
The Israeli government has declined to comment on the reports.
Senior Palestinian negotiator Saeb Erekat said the Haaretz report contained baseless statements and half-truths.
"They want to blame us Camp David-style for any failures in the negotiations," he said, referring to the aftermath of the peace talks in 2000.
Haaretz said it would be a "shelf agreement" implemented over considerable time.
Formation of a Palestinian state - which would be completely demilitarised - would be dependent on the retaking of Gaza from the militant group Hamas, it said.
But Israel would have a free hand to develop the settlement blocs immediately, Haaretz said.
Compared to previous negotiations, Haaretz says it is more generous than what Ehud Barak offered Yasser Arafat in 2000 and but less than his offer at Taba, Egypt, in 2001.
The latest talks have shown little visible progress and were dealt a further blow in July when Israeli Prime Minister Ehud Olmert announced he would resign within weeks as he battles a series of corruption allegations.