William Burns said unless Israel halted its settlement programme in the West Bank the future of Israel, as a democratic state, was threatened.
The warning came in a speech by William Burns, assistant secretary of state for Near Eastern affairs, at the US-Arab Economic Forum in Detroit.
The conference was called to explore ways of fostering growth, development and trade between the United States and the Arab world.
"As Israeli settlements expand and their populations increase, it becomes increasingly difficult to see how the two peoples will be separated into two states," Burns said.
This outpost near Bethlehem is
one of 60+ built after March 2001
"The fact is that settlements continue to grow today, encouraged by specific government policies and at enormous expense to Israel's economy, and this persists even as it becomes clear that the logic of settlements and the reality of demographics could threaten the future of Israel as a Jewish democracy."
Burns was referring to experts' predictions that Jews will become a minority in the area encompassing Israel, the West Bank and Gaza by 2020.
The international community says all the Israeli settlements are illegal. The US-backed ''road map'' for peace between the Israelis and Palestinians calls on Israel to freeze settlement construction at the very least.
Burns added that Israel's illegal settlement policy ran counter to the goal, supported by US President George Bush, of creating a contiguous Palestinian state alongside Israel, with the two eventually living side by side in peace.
"For friends of Israel, the conclusion is hard to escape," Burns said. "Settlement activity must stop because it ultimately undermines Israeli as well as Palestinian interests."
"Settlement activity must stop because it ultimately undermines Israeli as well as Palestinian interests"
US assistant secretary of state for Near Eastern affairs
In his speech, Burns also criticised Israel's planned Apartheid Wall through the West Bank, a security measure that Palestinians have described as a new "Berlin Wall."
"Not its existence as a separation barrier between Israel and the West Bank, but because its planned route inside the West Bank isolates Palestinians from each other, prejudges negotiations and, like settlement activity, takes us further from the two-state goal."