The White House and the State Department admitted that weeks of efforts to broker a new settlement freeze and resuscitate peace talks had gone nowhere.
"We have been pursuing a moratorium as a means to create conditions for a return to meaningful and sustained negotiations," State Department spokesman Philip Crowley told a televised press briefing in New York City.
"After a considerable effort, we have concluded that this does not create a firm basis to work towards our shared goal of a framework agreement."
In September, President Barack Obama presided over the relaunch of direct negotiations in Washington, but with the expiry of the Israeli settlement moratorium, the Palestinians abandoned talks.
In reaction to news of Washington’s dropped settlement freeze demand, a Palestinian official accused the right-wing government of Israeli Prime Minister Benjamin Netanyahu of wrecking chances for peace.
"By refusing to give a clear answer to the United States, Israel has refused to freeze settlement building and to give a chance to peace in the region," the official said, requesting anonymity.
Crowley said peace efforts would carry on, with Israeli and Palestinian negotiators to visit Washington next week.