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HILARY LEILA KRIEGER contributed to this report.

The Palestinian Authority has concluded that the peace process based on a two-state solution has failed, a senior Fatah official said on Tuesday.His statement came as PA officials repeated their rejection of Prime Minister Binyamin Netanyahu’s proposal to extend the settlement construction moratorium if the Palestinian leadership recognized Israel as a Jewish state.But the US urgently sought to keep talks going, and called on the Palestinians to present their own counter-proposal to keep things on track.Mahmoud Aloul, a member of the Fatah Central Committee, said that Israel’s “racist policies” were meant to undermine the peace process.“The Palestinian Authority made every effort to avoid reaching this conclusion, but Israeli racist policies led to the failure of the peace process,” he added.Aloul accused the US administration of failing to exert pressure on Israel to alter its policies and halt settlement construction.“The Americans left us no choice but to stop the peace negotiations,” he said. “The Palestinian leadership has briefed the Arab leaders on the difficult situation, and we have asked them to start taking real measures on the ground.”PLO negotiators Saeb Erekat and Nabil Sha’ath also reiterated their refusal to recognize Israel as a Jewish state. Another PLO official, Yasser Abed Rabbo, accused Netanyahu of seeking to destroy the image of US President Barack Obama in the Middle East by raising such a demand.In Washington, however, the State Department continued to urge the sides to come to a compromise and called for Palestinians to make clear what would be acceptable to them in lieu of a declaration that Israel is a Jewish state.“We want to see both of them stake the process. We want to see both of them offer their thinking about what needs to be, you know, advanced and agreed to that allows both sides to stay in these negotiations,” State Department spokesman PJ Crowley said Tuesday.“Prime Minister Netanyahu has offered his thoughts on both what he’s willing to contribute to the process, what he thinks he needs for his people out of the process – we would hope that the Palestinians would do the same thing,” he said.Crowley called on “both parties to continue to create conditions for the direct negotiations to continue.”The US has made certain proposals to Israel, widely understood to include additional military assistance and diplomatic support, in exchange for a two- or three-month extension of the settlement moratorium.But Crowley said it was ultimately up to the two sides to figure out what terms would work.“It’s not for us to say, ‘This is a pretty good deal; you ought to take it,’” he said.He described the current impasse as a “pause in the action” while issues connected to the settlement moratorium were worked through.A senior State Department official, Jeffrey Feltman, is on his way to visit Egypt, Saudi Arabia and Morocco, in part to try and advance the peace process.In contrast to the tough words from the Palestinians, an Israeli official said Tuesday that the “ball is still in play, this is still a work in process.”“If the Palestinians are willing to engage seriously in a process of give and take, Israel is willing to show flexibility,” the official said. “But it has to be a process of give and take, not demand and take.”The official said the whole moratorium matter was an “artificial issue.” The vast majority of construction is in large settlement blocs that Israel, according to various proposals that have been discussed over the years, would retain in any agreement, the official said. The amount to be built outside the major settlement blocs is minuscule and not going to change anything, he added.“No settlement growth in the coming year would influence the final map of peace, so for that reason this is an artificial issue,” he explained.But Fatah spokesman Ahmed Assaf said resuming settlement construction had “already foiled the peace talks.“Netanyahu’s new demand is an obstacle to the resumption of the peace talks,” he said.He also accused Netanyahu of thwarting US and EU efforts to achieve peace in the region.“Netanyahu knows in advance that the Palestinians won’t accept this demand,” the spokesman said. “This new condition is aimed at abolishing the right of return for the refugees and expelling the more than one million Palestinians living in Israel.”He added that if this was the price that Israel was demanding in return for freezing construction in the settlements, “what price would it ask for in return for removing the settlements and withdrawing from the occupied territories?”One Washington source suggested that Netanyahu’s move had not worked well with American officials, as it hadn’t come across as a sincere bid to resolve the issue, given that the Palestinians were sure to reject it.“It just looks like he doesn’t want to [extend the freeze], and he just wants to put it on the other side,” he said of Netanyahu apparently trying to shift responsibility – and blame – to the Palestinians.“I don’t think it plays well here,” he said, “but I don’t think anybody wants to criticize it."