"We have to move on to the next step," Rice said.
"It is not going to produce stability in the Balkans to ignore the reality of the situation."
Peacekeepers to stay
The mediators' report blamed both sides for failing to reach agreement:
"Both parties must be reminded that their failure to live up to these commitments will affect the achievement of the European future that they both seek," it said.
Sergei Lavrov, the Russian foreign minister, said that any solution on Kosovo that is not within a UN framework would take Europe on a "slippery downward slope" to instability.
Earlier on Friday, Nato countries agreed that their 16,000 peacekeepers could stay in Kosovo on the basis of their existing UN mandate, even after independence.
And in a reminder of continuing security threats there, Kosovo's Serbs scuffled with Nato forces during a visit by their commander to the Serb-populated village of Gorazdevac.
Officially still a province of Serbia, Kosovo has been administered by the UN since a 1999 Nato bombing campaign to halt killings and forced population moves by Serb forces of the 90 per cent ethnic Albanian majority in the province.
Martti Ahtisaari, the UN special envoy to Kosovo presented a plan in early 2007 calling for its independence under international supervision.
The four months of talks were held at Russian insistence after Moscow, a Serbian ally, blocked a Security Council resolution based on the plan.
Washington and most EU states are likely to recognise a declaration of independence by Kosovo but are confident its leaders will wait until around late January to enable Nato and the EU to prepare for it.
But Vuk Jeremic, the Serbian foreign minister, said on Thursday that if independence was declared, "short of using military force, Serbia is going to do everything that is in our diplomatic power, legal power, economic power, political power" to make sure the decision was reversed.