U.S. Secretary of State John Kerry has cancelled plans to meet Palestinian President Mahmoud Abbas in the West Bank city of Ramallah on Wednesday.
Kerry cancelled his planned trip after Mr. Abbas said Palestinians are immediately resuming their bid to win further United Nations recognition and that he had signed a request to join 15 U.N. agencies and conventions.
There was no immediate comment from Israel, but officials there reissued tenders for more than 700 settler homes in East Jerusalem on Tuesday.
The moves by both sides looked set to derail U.S.-negotiated peace talks.
But Kerry, speaking in Brussels, said it is "completely premature" to write off the Israeli-Palestinian peace process now. He said both parties have indicated they want to move forward with negotiations.
Earlier, officials close to the discussions said an agreement had been emerging that would extend negotiations through 2015 in exchange for the release of a convicted American spying for Israel.
The deal would also include the release of hundreds of Palestinian prisoners and a partial freeze on construction of Jewish settlements in the West Bank.
Kerry and Israeli Prime Minister Benjamin Netanyahu hammered out details of the plan Tuesday, during their second set of talks in as many days.
Under the proposed deal, Jonathan Pollard, a civilian intelligence analyst for the U.S. Navy, would be released from prison before the Jewish holiday of Passover, which begins in mid-April.
A Jewish American who was granted Israeli citizenship while he was in prison in 1995, Pollard gave thousands of classified documents to his Israeli handlers. He was arrested in 1985 after unsuccessfully seeking refuge at the Israeli embassy in Washington.
Pollard pleaded guilty to leaking classified documents to Israel and received a life sentence. U.S. President Barack Obama and his predecessors have previously refused to release him, despite pleas from Israeli leaders.
The White House said Tuesday that Mr. Obama has not yet decided to set Pollard free.
In exchange for his release, Israel would free a fourth group of long-serving Palestinian prisoners, including 14 Arab Israelis whose release is deeply controversial in Israel, as well as 400 other Palestinians who have not been convicted of killing Israelis.
Israel would also agree to "adopt a policy of restraint" in building West Bank settlements. Sources say the limited freeze would not include East Jerusalem, private construction or the building of public institutions.
Palestinian leaders were cool to the emerging proposal, saying it fell far short of their demands for a complete halt to settlement construction and freedom for 1,000 prisoners of their choosing.
The prisoner releases are part of the pact that brought Israelis and Palestinians back to the negotiating table for a nine-month period beginning last July.
The parties involved in the peace effort have not publicly discussed the details of the negotiations, but there has been little visible progress on narrowing gaps on major issues. These include the status of Jerusalem, the fate of Palestinian refugees, borders and security.