Ehud Olmert's proposals, presented in an interview with the Yediot Ahronot daily on Sunday, are seen as a way for Prime Minister Ariel Sharon to test reaction to such measures.
Proposing Israel retreat to its own border, Olmert told journalists he was speaking for many members of the Likud Party who feel the same way.
Israeli media have also quoted Sharon's advisers as saying that if peace efforts fail, he might dismantle some settlements, annex others and turn a separation barrier Israel is building in the West Bank into a border.
Public Security Minister Tzachi Hanegbi of Sharon's Likud party said Olmert's proposal would "endanger" Israel.
"There is no way that the Likud leadership will adopt this frightening withdrawal," he told Yediot.
Israel Radio reported that far-right cabinet minister Avigdor Lieberman got into a heated argument with Sharon over the proposals.
Housing Minister Effie Eitam of the National Religious Party told Israel Army Radio that his party would abandon the government if Olmert's ideas are adopted.
However, Israel's PM tried to reassure ministers, saying any plan would be submitted to the cabinet for approval.
There appears to be growing support in Israel for a withdrawal from at least parts of the West Bank and Gaza Strip, where the Palestinians hope to establish an independent state.
A recent poll showed 60% of Israelis supporting a plan to unilaterally dismantle some settlements if talks fail.
Immigrant Absorption Minister Tzipi Livni, a Likud member, told Army Radio that concessions were inevitable.
"Our mission is to have Israel be a Jewish and democratic and secure state," she said. This "will force us to give up part of the Land of Israel."
Former Prime Minister Ehud Barak, of the opposition Labor party, told the radio that "the Likud clearly deserves an extended hand" if the Olmert plan was adopted.
Sharon's adviser, Raanan Gissin, would not say what ideas Sharon was considering, but said the government remained committed to the US-backed road map peace plan.
The road map envisions a negotiated agreement, with a Palestinian state by 2005.
Meanwhile, Olmert added that instead of waiting for an agreement that might not happen, Israel should "act unilaterally, [and then] there is a good chance that we will be able to carry it out".