Israel must chose between "settlements or peace," Palestinian chief negotiator Saeb Erakat said on Monday ahead of the September 2 restart of negotiations in Washington.
"The choice of the Israeli government is settlement or peace, they cannot have both," he said at a news conference in Ramallah, the political capital of the Israeli-occupied West Bank.
But he also said he believed agreement could be reached within one year.
"We think it is doable."
Palestinian president Mahmud Abbas, in a letter to EU foreign policy chief Catherine Ashton dated August 21 and seen by AFP on Monday, also warned that the talks would be cut short if Israel resumes settlement activities.
Both sides agreed to relaunch direct negotiations after a 20-month hiatus, even though the Palestinians had initially insisted they would not hold face-to-face talks unless the Israelis freeze settlement activity in the West Bank, including Jerusalem.
But Erakat made it clear on Monday that settlements remain a major issue, and that it now remains to be seen whether Israel will renew a 10-month moratorium on settlement construction it imposed in November last year.
"If Mr Netanyahu decides to renew settlement tenders come September 26, he will have decided to stop negotiations," he said.
Prime Minister Benjamin Netanyahu has indicated in the past the moratorium would conclude on that date.
And Vice Prime Minister Silvan Shalom reiterated on Monday that the moratorium was unlikely to be renewed.
"I don't think the freeze will be extended," he told public radio.
"The Palestinians cannot use this as a pretext to suspend negotiations," he warned.
The international community has pressed Israel to halt settlement activity while Netanyahu is under pressure at home to allow construction to resume.
The Palestinians have urged the US administration to demand guarantees from Israel on the issue, which has been a major hurdle in past peace efforts.
"We heard from the Americans that if we entered into direct negotiations we will be in a better position to have the moratorium extended, whether you call that an assurance or not," Erakat said.
"We hope Mr Netanyahu will choose reconciliation and not further confrontation and that's up to him," he said.
In his letter to Ashton, Abbas said: "I fear that ongoing settlement activity, especially in east Jerusalem, along with other Israeli violations of international law and the roadmap will further undermine the credibility of negotiations in the eyes of my people."
He also told Ashton he had warned US Middle East envoy George Mitchell that the talks could be scuttled by a resumption of settlement activities.
"It should be noted that I have stated to Senator Mitchell that if Israel resumes settlement activities, including in east Jerusalem, we cannot continue with negotiations," he said.
Both sides have traded accusations of holding up the peace process and each has said it is now up to the other to make it work.
"We are seeking to surprise the critics and the sceptics, but in order to do this we need a real partner on the Palestinian side. It is possible to succeed with a hand extended in peace, but only if someone on the other side likewise extends one," Netanyahu said on Sunday.
A string of interim agreements have been reached since the 1993 Oslo accords gave the Palestinians limited autonomy pending a "final-status" settlement on an independent state but they have failed to bear fruit.
A relaunch of negotiations amid much fanfare at Annapolis in Maryland in November 2007 had produced no visible results by the time the talks collapsed when Israel launched its devastating military 22-day offensive on the Gaza Strip just over a year later.