Rice said on Sunday that both sides agreed that the homes occupied by about 8000 illegal Jewish settlers would do little to address the housing needs of the 1.3 million Palestinians living in the occupied territory.
"The view is that there are better land uses for the Palestinians to better address their housing needs," she told a news conference before heading to Jordan on the next leg of her Middle East tour.
"The important thing is that the parties want to work on this issue together."
Israeli Foreign Ministry spokesman Mark Regev said the houses could have remained standing. "It was their [the Palestinians'] choice. If they wanted them they could have had them," he said.
Chief Palestinian negotiator Saeb Erekat said they had always wanted the homes to be demolished.
"We have always stipulated our position that all such buildings should be demolished and the rubble taken away, in accordance with the international law," he said.
Rice said the proposed summer Gaza pullout is a historic opportunity to advance the wider Middle East peace process.
"We have always stipulated our position that all such buildings should be demolished and the rubble taken away, in accordance with the international law"
chief Palestinian negotiator
But after talks with Palestinian leader Mahmoud Abbas on Saturday, Rice warned that time is running out for both sides to step up their efforts to coordinate the withdrawal, initially envisaged by Israeli Prime Minister Ariel Sharon as a unilateral move.
The internationally drafted peace plan, which aims to create an independent Palestinian state, has largely stalled since its 2003 launch.
A senior Israeli official, speaking on condition of anonymity, said that despite the agreement on the house demolitions, major differences remained, particularly over access in and out of Gaza.
Israel is planning to retain control of the Rafah border crossing between Gaza and Egypt, concerned that arms-smuggling to Palestinian resistance groups will increase if it is controlled by the Palestinians.
Negotiations are ongoing for Egypt to assume responsibility, with Foreign Minister Ahmed Abul Gheit meeting top Israeli officials on Sunday.
Egypt's Ahmed Abul Gheit (L) is
to meet Israeli officials
"The critical issue now is the crossing points. Concern is a very mild description for what we feel," said the Israeli official.
On Saturday, Israel closed the Rafah border as it intensified security measures against those trying to cross the Egyptian border into Gaza.
Aljazeera's correspondent in Cairo reported that about 600 Palestinians were stranded on the Egyptian side of the crossing.
He said most of them worked in the Arab Gulf states and wanted to spend their holidays with their relatives.
Critics charge that Sharon is hoping that a voluntary pullout from Gaza will enable Israel to entrench its settlements in the West Bank.
There are about 500,000 Jewish settlers living on occupied Arab land in the West Bank, Gaza and East Jerusalem.