Israeli officials were reportedly astounded to hear John Kerry pin the blame on Binyamin Netanyahu for the impasse in the latest round of peace talks with the Palestinians. Maybe they were being a tad naive? Or perhaps Kerry didn't intend to be that blunt? But there's little doubt it was bad news for Netanyahu.

The US has since made soothing noises suggesting that the secretary of state was not in fact pointing the finger exclusively at Israel. Still, his account to the Senate foreign relations committee suggested otherwise: first in the sequence of events he described came Israel's refusal to free 26 prisoners (vital for Mahmoud Abbas to demonstrate he has something tangible to show for negotiating); then the announcement of 700 new settlement units ("Poof, that was the moment," Kerry said); and only then came the violation by the Palestinians – their unilateral move to sign up to international treaties to allow them to tackle Israel's 46-year-old occupation through legal means.

Kerry has invested a huge amount of time, effort and diplomatic capital in an effort to cajole the parties into coming back to the negotiating table and then staying there and making enough concessions to ensure the process continues. Kerry and his officials insist that it can still go on, though the onus is on both protagonists to make sure it does.

The original US deadline of the end of April for an Israeli-Palestinian "framework agreement" now appears impossible to reach, and there are warnings that the window of opportunity for a two-state solution to the conflict is set to slam shut. Kerry has predicted that Israel will face new pressure – in the form of growing calls for boycotts or sanctions – if that option is no longer available.

In the febrile, closely observed world of the peace process, things never stand still for long. Netanyahu's own commitment to a viable two-state outcome may be hard to assess, but the difficulty with his coalition partners was highlighted immediately when his minister of the economy, Naftali Bennett, of the far-right Jewish Home party, vowed that Israel would never apologise for building in Jerusalem.

Settlement in the occupied territories remains the single most important issue on the table – far larger than the recently introduced demand for Palestinian recognition of Israel as a Jewish state.

Retaliation was not long in coming: Netanyahu on Wednesday ordered his officials to stop meeting their Palestinian counterparts. The only exception was Tzipi Livni, Israel's chief negotiator. Whether there will be anything much for her to talk about is a different matter. In the absence of a meaningful process, things look more favourable for the Palestinians in the long term.

It is hard to say whether there ever really was a fair chance for Kerry's effort in the face of Palestinian internal divisions as well as Israeli conditions. But it would still be an uncharacteristically bold US administration that admits to total, final failure. "For better or worse, in some form, the overall process will go on and on – and on," said Aaron David Miller, an old hand at the game.

But the US may need to change tack. "The only reason there's any public ambiguity about who is to blame for this latest diplomatic crisis is that the Obama administration … won't play referee," wrote the liberal Jewish American columnist Peter Beinart in Haaretz. "It won't point out the obvious: that one party to the current talks accepts the 1967 lines as the basis for talks and the other doesn't."

Kerry faces a dilemma about what to do next, as well as explicit demands in Washington to get tougher with Israel. Zbigniew Brzezinski, a former US national security adviser, and other foreign policy luminaries quickly urged a stronger line on what so many on both sides consider to be the key roadblock.

"US disapproval of continued settlement enlargement in the occupied territories by Israel's government as 'illegitimate' and 'unhelpful' does not begin to define the destructiveness of this activity," they wrote. "Nor does it dispel the impression that we have come to accept it despite our rhetorical objections. Halting the diplomatic process on a date certain until Israel complies with international law and previous agreements would help to stop this activity and clearly place the onus for the interruption where it belongs."