Israeli Prime Minister Benjamin Netanyahu on Wednesday accused Palestinians of creating "artificial crises" during talks with US Secretary of State John Kerry, who is striving to rescue the fragile peace process.

Kerry's arrival in the region late Tuesday for meetings with both sides comes amid growing indications the US-brokered peace talks that resumed in late July are on the brink of collapse.

Palestinian negotiators, incensed by Israeli settlement expansion in the West Bank, have threatened to quit the talks, which despite three months of secretive meetings have produced no sign of an agreement.

Netanyahu played down the Palestinian concerns at a meeting with Kerry in Jerusalem, accusing them of avoiding tough decisions and calling on the US to get the negotiations back on track.

"I am concerned about progress because I see the Palestinians continuing with incitements, to create artificial crises ... and run away from historic decisions that are needed to make a genuine peace," he told Kerry, according to a statement from his office.

The top US diplomat voiced confidence the two sides could reach the peace deal that has eluded them for decades if they were prepared to "make real compromises and hard decisions."

"There are always difficulties, always tensions. I am very confident of our ability to work through them," he told reporters after the meeting.

In a symbolic gesture, Kerry's first stop on landing on Tuesday evening was to visit the Tel Aviv square where the late prime minister Yitzhak Rabin was gunned down 18 years ago by a rightwing Israeli opposed to the peace talks.

"He dared to take the risks for peace, not just because it was important to take the risks, but that it was vital to secure the future of Israel and the region," Kerry said after laying a wreath.

Speaking to reporters later in Tel Aviv's Rabin Square, Kerry sent a clear message to Israel's leaders, urging them to seek peace "with the same determination prime minister Rabin showed".

But just hours later, following a stormy meeting between negotiators from both sides, a senior Palestinian official said his delegation would not be able to continue talking in light of the latest Israeli moves to advance settlement construction.

"The Palestinian-Israeli negotiations broke down during the session on Tuesday night," the official told AFP, speaking on condition of anonymity.

"The Israeli side is determined to continue its settlement and we cannot continue negotiations under these unprecedented settlement attacks," he warned.

Over the past week, Israel has announced plans to move forward with thousands of new settler homes, a large percentage of them in annexed Arab east Jerusalem.

Kerry was later Wednesday to head to the southern West Bank city of Bethlehem for talks with Palestinian president Mahmud Abbas, who was also expected to drive home the divisive issue of settlements.

He will then return to Jerusalem to meet Israeli President Shimon Peres before a private dinner with Netanyahu.

Local media had on Tuesday reported that Israeli negotiators sought to have the separation barrier that cuts through the West Bank serve as the border of a future Palestinian state.

The Palestinians insist borders should be based on the lines that existed before the 1967 Six-Day War, when Israel seized Gaza and the West Bank, including Arab east Jerusalem.

But Netanyahu has rejected any return to the 1967 lines as "indefensible", saying it would not take into account the "demographic changes on the ground" -- a clear euphemism for Jewish settlements.

Israel began work on its sprawling "security fence" in 2002 at the height of the second intifada or uprising, and has defended its construction as a crucial protective measure, pointing to a drop in attacks inside Israel as proof of its success.

The Palestinians, who refer to it as the "apartheid wall", say the barrier is a land grab, saying when complete 85 percent of it will have been built inside the West Bank.