Palestinians condemned the idea as a form of apartheid and said the initiative appeared aimed at cementing Israel's hold on occupied land that they want for a state.
The Israeli source, who asked not to be named because the government has yet to finalise the road plan, said on Thursday there was no intention of formally limiting Palestinian movement.
"We want to ease access to various Palestinian communities," the source said. "There is no intention of bringing about a separation of Israeli and Palestinian traffic. Palestinians will continue to make use of the roads they use today."
The source said, however, that Israelis would be banned from the future Palestinians-only roads because "we do not want them to get into a situation where their lives would be at risk".
No details were immediately available of the extent of the proposed network or of when the plan might take effect.
"This is an apartheid system," said top Palestinian negotiator Saeb Erikat. "We urge the international community to help us in order to cancel such policies and end Israeli occupation."
About 245,000 Jews live among 2.4 million Palestinians in the West Bank.
Israel, which quit the Gaza Strip last year in what it called a step to "disengage" from conflict with the Palestinians, says it will keep major West Bank settlement blocs under any accord.
Debate over any withdrawals from more isolated settlements is looming large ahead of next month's Israeli elections.
Using curfews and military checkpoints, Israel has often imposed ad hoc restrictions on Palestinians since fighting erupted in 2000. Palestinian and settler vehicles have different number plates, which eases the enforcement of Israeli bans.
In the Gaza Strip, settlers had at least one major road for their exclusive use, which circumvented a Palestinian highway.
Israel called the move a security measure.
The World Court has branded all Israel's settlements on occupied land illegal. Israel disputes this.