A rising star in the Israeli cabinet has declared that the idea of a Palestinian state is dead, in a statement that will dismay the US secretary of state, John Kerry, whose mission to restart peace talks between the two sides is struggling to make headway.

Naftali Bennett, who was appointed Israel's economics and trade minister following a strong showing in January's election, told a conference of settlers in Jerusalem that Israel should urgently annex large tracts of the West Bank currently under its control.

Referring to the idea of a Palestinian state, Bennett said: "Never have so many people invested so much energy in something that is hopeless."

The challenge, he added, was "how do we move forward from here, knowing that a Palestinian state within Israel is not possible ... We have to move from solving the problem to living with the problem." Annexation of "Area C", the 62% of the West Bank under total Israeli control, should proceed "as quickly as possible".

Bennett said: "The most important thing in the land of Israel is to build, build, build. It's important that there will be an Israeli presence everywhere.

"This land has been ours for 3,000 years. There was never a Palestinian state here and we were never occupiers. The house is ours and we are residents here, not the occupiers."

The trade minister's comments were swiftly attacked by the Palestinian chief negotiator, Saeb Erekat, who said Israel had "officially declared the death of the two-state solution".

Statements from Bennett and other senior Israeli politicians and officials in recent days were "matched by policies that [prime minister Binyamin] Netanyahu is pushing on the ground, including aggressive settlement activity, home demolitions, evictions and ID [identity papers] revocations. This is part of Israel's plan to destroy any possibility for a Palestinian state."

The Israeli government was "determined to make Kerry's efforts fail", said Erekat.

Israel's deputy foreign minister, Zeev Elkin, who lives in a West Bank settlement, told the conference that he agreed with Bennett's remarks but said there was still a battle to be fought over the idea of a Palestinian state.

Two weeks ago, the deputy defence minister, Danny Danon, claimed a majority within the Israeli government staunchly opposed the creation of a Palestinian state. "If there will be a move to promote a two-state solution, you will see forces blocking it within the party and the government," he said in an interview.

And last week, defence minister Moshe Ya'alon described the Arab peace initiative – which Kerry has suggested as a basis for talks between the two sides – as "spin". Ya'alon said he was not optimistic about progress, "so we must be prepared to manage the conflict".

Many on both the Palestinian and Israeli sides privately acknowledge that Kerry's mission is in trouble, although European diplomats still stress the secretary of state's commitment and energy, and say a positive outcome is possible as well as vital. Kerry cancelled his fifth visit to the region as part of his drive last week, citing scheduling difficulties.