The United States is abandoning efforts to persuade Israel to renew a freeze on settlement-building as part of efforts to revive Middle East peace talks.
Washington had been negotiating with Israel to try to meet Palestinian conditions for restarting direct talks.
The Palestinians suspended talks in September after a 10-month freeze on Israeli building in the West Bank, excluding East Jerusalem, expired.
The US says it will continue to explore ways to bring the two sides together.
A senior US official told the BBC that attempts to get Israel to renew a partial freeze on settlement construction in occupied territory had failed.
But he said this did not mean the end of Washington's efforts.
The peace talks resumed in September after a break of almost two years but were suspended almost immediately when Israel decided not to extend the ban on settlement building in the West Bank.
Israeli defence minister Ehud Barak said talks with the Americans had been postponed because Washington was distracted by the fallout from the release of secret documents by the whistle-blowing website Wikileaks and the crisis over North Korea.
But state department spokesman PJ Crowley denied this was the case.
"There is not a change in strategy, there may well be a change in tactics," he said.
"We have been pursuing a moratorium as a means to create conditions for a return to meaningful and sustained negotiations. 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.
"We will have further conversations on the substance with the parties, and we will continue to try to find ways to create the kind of confidence that will eventually, we hope, allow them to engage directly."
A spokesman for Palestinian President Mahmoud Abbas said he was studying the US decision before responding.
But Maen Rashid Areikat, the Palestine Liberation Organisation's chief representative to the US, told the BBC's World Today programme that Israel should be made to comply with international law over the issue of settlement building.
"We will not tolerate the continuation of Israeli settlements in the Palestinian occupied territories," he said.
"I don't think that there will be a change of Palestinian position in the near future."
The Palestinians have said previously they will not return to the negotiating table while settlement building continues.
Last month, the Obama administration offered Israel a sizeable package of incentives, including jet fighters and security guarantees, in return for a 90-day extension of the previous moratorium.
Israeli Prime Minister Benjamin Netanyahu offered to renew the freeze if the Palestinians recognised Israel as a Jewish state, but the Palestinian Authority dismissed the idea.
It is unclear how the US is planning to proceed, says the BBC's Kim Ghattas at the state department in Washington.
Palestinian and Israeli negotiators will be in Washington next week and Secretary of State Hillary Clinton will make a speech about the Middle East on Friday.
The fact that the Palestinians are coming means they accept that calling for a freeze first is not working, our correspondent says.
Israel has occupied the West Bank, including East Jerusalem, since 1967, settling close to 500,000 Jews in more than 100 settlements. They are considered illegal under international law, although Israel disputes this.
There are about 2.5 million Palestinians living in the West Bank.