RAMALLAH, West Bank, Nov 4 (Reuters) - Palestinians may have to abandon the goal of an independent state if Israel continues to expand Jewish settlements and the United States does not stop it, chief Palestinian negotiator Saeb Erekat said on Wednesday. It may be time for Palestinian President Mahmoud Abbas to "tell his people the truth, that with the continuation of settlement activities, the two-state solution is no longer an option", Erekat told a news conference.

Citing a 2003 peace "road map" that also calls on Palestinians to rein in militants, Abbas has made a cessation of Israeli settlement activity in the occupied West Bank a precondition for resuming statehood talks with Israel.

U.S. Secretary of State Hillary Clinton, who met Israeli and Palestinian leaders on Saturday, unsuccessfully urged Abbas to negotiate with Israel and resolve the settlement issue within the framework of the talks.

Erekat said Clinton -- who praised as unprecedented Netanyahu's offer to limit temporarily construction in West Bank settlements to 3,000 additional housing units -- was only opening the door to more settlements in the next two years.

The alternative left for Palestinians is to "refocus their attention on the one-state solution where Muslims, Christians and Jews can live as equals", Erekat said. "It is very serious. This is the moment of truth for us."

Israel has rejected a single state for Israelis and Palestinians as a demographic timebomb that would make Jews a minority in the country.

Erekat said Netanyahu's concept of a Palestinian state with limited powers of sovereignty and his uncompromising position on the future of Jerusalem were tantamount to dictating the terms of peace negotiations in advance.

Netanyahu, Erekat said, told Abbas "that Jerusalem will be the eternal and united capital of Israel, that refugees won't be discussed, that our state will be demilitarised, that we have to recognise the Jewish state, that it's not going to be the 1967 borders, that the skies will be under his control" .

"This is dictation and not negotiations," he said.

Netanyahu and Abbas last met in New York in September in a handshake meeting arranged by U.S. President Barack Obama.

Clinton reaffirmed in Cairo on Wednesday that Washington does not accept the legitimacy of Israeli settlements built on land captured in a 1967 war.

But she added, in another nudge to Palestinians to talk with Israel: "Getting into final status negotiations will allow us to bring an end to settlement activity."

Erekat said Palestinians "made a mistake" in the past by agreeing to negotiate with Israel without insisting that settlement building be stopped, and there were not about to repeat that error this time.

Netanyahu's predecessor Ehud Olmert negotiated with the Palestinians throughout his 3-year term but left office with more Jewish settlements in the West Bank than when he started, he said.