The presidents and prime ministers of Serbia and Kosovo opened the one-day talks in the Gothic Room in the Vienna palace earlier on Monday, the first such face-to-face discussions since NATO bombs drove Serb forces from the province in 1999.
But Martti Ahtisaari, the UN special envoy, said afterwards, "They are as far apart as possible: Belgrade would accept everything but independence, while Kosovo Albanians will accept nothing but independence.
"It was the first meeting of this kind. It would be totally wrong from my side to expect any breakthrough.
Nearly 90 percent of Kosovo's two million people are Albanians who reject any return to Serb rule, but Serbs consider Kosovo the cradle of Serb nationhood.
Vojislav Kostunica, the Serbian Prime Minister, offered "substantial autonomy" for Kosovo, but said the country "cannot accept the creation of a separate state on 15% of its territory".
Kosovo's ethnic Albanian President Fatmir Sejdiu had said independence is "the beginning and end of our position."
"The will for independence cannot be ignored or negotiated away," he added.
Ahtisaari had earlier played down hopes of a breakthrough at the talks. Six months of lower-level direct talks had produced few signs of compromise.
About 800,000 ethnic Albanians
were expelled by Serb forces
Diplomats see little alternative to independence, which would be supervised by the European Union for years.
Despite the deadlock, the EU is going ahead with plans to take on a policing and supervising role.
Officials of the six-member contact group - that includes the US and Russia – were also at the meeting.
The United States is pushing for a deal this year but Russia - a traditional ally of Serbia - has warned against any "artificial timetable."
The UN took control of the province after a Nato bombing campaign pushed forces under Slobodan Milosevic out.
Nato bombed the Serbs for 78 days in 1999 to halt civilian killings and ethnic cleansing by Serb forces during a two-year war with separatist fighters. About 10,000 Albanians died and 800,000 were expelled.
Vojislav Kostunica, the Serbian prime minister, said ahead of the talks, "The sooner the dangerous idea of creating a new state on Serbian territory is forgotten the better for all."