"Tensions in the region are near the breaking point. Extremism and populism are leaving less political space for moderates, including those states that have reached peace agreements with Israel."
He warned that the opportunity for negotiating a two-state solution - Israel and Palestine, living within secure, recognised borders based on those of June 4, 1967 - "will last for only so long".
Annan said: "Should we fail to seize it, the people who most directly bear the brunt of this calamity will be consigned to new depths of suffering and grief. ... Other conflicts and problems will become that much harder to resolve."
"Annan did nothing to bring peace to the world."
Aziz Ahmed, London, UK
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He reiterated that the road map, the blueprint for peace drawn up by the diplomatic quartet, the European Union, the US, Russia and the UN, remained "the reference point around which any effort to re-energise a political effort on the Israeli-Palestinian track should be centered".
He urged the Quartet to "be clearer at the outset on the parameters of a end-game deal" and to "be open to new ideas and initiatives".
Annan's comment came a day after the release of his last Middle East report before he steps down at the end of the month.
In his report, Annan said that "the search for stability in Iraq, Lebanon and elsewhere will be greatly served by a concerted effort to address the legitimate aspirations of Israelis, Palestinians, Syrians and Lebanese to achieve two independent and secure states of Israel and Palestine, an end to the occupation of Arab land both in the occupied Palestinian territory and the Golan Heights" as well as peace in Lebanon.
He also stressed the need to find "new ways of protecting Palestinian and Israeli civilians" from the continuing violence and to establish clear parameters for settling final status issues such as the fate of Jerusalem and the return of Palestinian refugees.