Mahmoud Abbas, the Palestinian president, and Ehud Olmert, the Israeli prime minister, were under US pressure to submit a joint statement addressing, in general terms, borders and the future of Jerusalem and Palestinian refugees, but they failed to reach an agreement.
Some concessions were made, including Israeli cabinet approval to release 441 Palestinian prisoners and Olmert saying Israel would stop building new West Bank settlements.
But Al Jazeera's Jackie Rowland said that to Palestinian eyes, the concessions were limited.
The number of prisoners to be released falls short of the 2,000 requested by Abbas and represents only a fraction of the 10,000 believed to be held by Israel.
And Olmert's declaration on settlements stopped short of announcing a freeze on construction in existing communities on occupied lands, as demanded by the Palestinians.
Following the talks, an Israeli official told reporters: "Both sides have made some progress ... but other issues still remain open."
Saeb Erakat, the chief Palestinian negotiator, said "the meeting was difficult, the differences remain".
High-level Arab attendance is seen as crucial to success of the Annapolis conference and a deepening deadlock could jeopardise the participation of already hesitant Arab countries.
Arab League members will be briefed by Abbas in Cairo on Friday before deciding whether they will attend.
Olmert is to meet Hosni Mubarak, Egypt's president, on Tuesday in Cairo to lay out the Israeli position.
The US-sponsored conference comes at a time when both Abbas and Olmert are politically weakened.
Olmert is facing police investigations over alleged corruption, which he has denied, and the results of an official inquiry into his handling of the 2006 Lebanon war.
Fatah, led by Abbas, was driven out of the Gaza Strip in June by the rival Hamas movement.
Hamas, however, remains sidelined from the conference and the territory it controls has ground to a halt under the weight of international economic sanctions.
Israel also sealed Gaza's borders in June, barring most imports.
Also on Monday, Tony Blair, the Middle East envoy for the so-called Quartet of countries attempting to broker peace, announced four development projects aimed at bolstering the Palestinian economy as part of efforts to end the conflict with Israel.
The former British prime minister unveiled the initiatives with Salam Fayyad, the Palestinian prime minister, and Ehud Barak, Israel's defence minister.
|Blair, centre, unveiled the initiatives with |
Fayyad, right, and Barak [AFP]
He said the projects, including a sewage treatment plant in the Gaza Strip to be funded by the World Bank, were integral to peace efforts.
"It's not a substitute in any way for the politics, for the work that will go on in Annapolis," Blair said. "It will not by itself transform the future."
But he added: "It is a strong beginning for what is a critical part of this process, because without hope of prosperity and a rise in living standards and giving people an economic stake in the future ... then the politics will never succeed."
The project to shore up collapsing sewage infrastructure in Gaza was approved by Israel as a humanitarian project, the Israeli defence minister said, despite the Jewish state's declaration that the Palestinian territory is an "enemy entity".
Blair, who represents the UN, US, EU and Russia, said some sewage would run in new pipes from January and by next June, 200,000 of Gaza's 1.5 million people would benefit.
At least four people died last March when a sewage pond burst its banks in the north of the Gaza Strip.
Work would also now begin, Blair told a news conference, on creating industrial and commercial zones in the West Bank cities of Jericho and Hebron, largely funded by Japan and Turkey respectively, and improving tourist access and facilities at Bethlehem.
Projects under discussion for the Palestinian territories include efforts to improve housing, education and recreational resources.
Source: Al Jazeera and agencies