Ahmed Qurie, who heads Palestinian negotiators in U.S.-brokered talks with Israel, told Fatah party loyalists behind closed doors that a two-state solution could be achieved only if Israel met their demands to withdraw from all occupied land.

"The Palestinian leadership has been working on establishing a Palestinian state within the '67 borders," Qurie said, referring to land in the West Bank and Gaza Strip that Israel captured in a 1967 war, which Palestinians seek for a state.

"If Israel continues to oppose making this a reality, then the Palestinian demand for the Palestinian people and its leadership (would be) one state, a binational state," he added at the meeting held in the West Bank town of Ramallah.

His comments were carried in a statement issued after the meeting.

Israel objects to the idea of forging a joint state, and says absorbing millions of Palestinians could undermine its future as a majority Jewish country.

The chances of achieving Washington's goal of a peace deal before President George W. Bush leaves office next year have dimmed since a scandal-struck Israeli Prime Minister Ehud Olmert announced last month he planned to resign in the coming weeks.

Despite the Israeli political crisis, Olmert, who has vowed to pursue peace efforts until he leaves office, met with Palestinian President Mahmoud Abbas last week. The two are said to be planning additional talks later this month.

But months of discussions have produced little visible progress on key issues of the conflict such as who would control Jerusalem, a city both Israel and the Palestinians want for a capital, and the future for millions of Palestinian refugees.

Abbas has also had his authority undermined by the loss of Gaza to Hamas Islamists in a bloody fight last year.

A Palestinian official said Qurie told Sunday's gathering he thought the peace talks had hit an impasse.

The unsuccessful efforts to realise the goal of a separate state has touched off debate among Palestinians for months, including as to whether they should seek instead to merge into a joint state with Israel.