Clinton argued that peace talks would counter extremism
US Secretary of State Hillary Clinton has again called on Israel to do more to pursue peace with the Palestinians.
She urged Israel to support efforts by the Palestinian Authority in the West Bank to strengthen institutions.
Mrs Clinton also called on the Palestinians to promote peace by ending incitement and fighting corruption.
Jewish settlement construction has caused deep strain in relations between the US and Israel and has hampered efforts to revive peace talks.
The secretary of state said supporting the Palestinian Authority led by Mahmoud Abbas was the best weapon to counter Hamas and other extremists.
The US has been trying to launch proximity talks between the two sides.
These were knocked off course by an announcement that Israel had approved plans for 1,600 new homes in the East Jerusalem settlement of Ramat Shlomo during a visit to Israel by US Vice-President Joe Biden.
The secretary of state called for "bold leadership" on all sides when she spoke at a dinner attended by the ambassadors of Israel and several Arab states.
"Prime Minister Netanyahu has embraced the vision of the two-state solution," Mrs Clinton said.
"But easing up on access and movement in the West Bank, in response to credible Palestinian security performance, is not sufficient to prove to the Palestinians that this embrace is sincere."
"We encourage Israel to continue building momentum toward a comprehensive peace by demonstrating respect for the legitimate aspirations of the Palestinians, stopping settlement activity and addressing the humanitarian needs in Gaza, and to refrain from unilateral statements and actions that could undermine trust or risk prejudicing the outcome of talks," she added.
Israel has occupied the West Bank, including East Jerusalem, since 1967. It insists Jerusalem will remain its undivided capital, while Palestinians want to establish the capital of their state in the East Jerusalem.
Nearly half a million Jews live in more than 100 settlements in the West Bank, among a Palestinian population of about 2.5 million.
The settlements are illegal under international law, although Israel disputes this.
The Middle East quartet - the US, EU, UN and Russia - has called for a halt in settlement building and immediate final status negotiations to reach a comprehensive peace deal within two years.