"If the Israeli government decides to announce new tenders on September 26, then we won't be able to continue with the talks," he said.
"We hope that the Israeli government will choose peace not settlements, will choose reconciliation and not the continuation of occupation."
A 10-month moratorium on new building in the Palestinian territory is due to expire at the end of September and the majority of Netanyahu's cabinet is believed to be against extending the suspension.
Al Jazeera's Nour Odeh, reporting from Ramallah in the West Bank, said that settlement construction, which is illegal under international law, was a "political hot potato" for both Palestinian politicians and the Palestinian public.
"The Palestinian leadership ... is aware how important this issue is ... to finding a negotiated settlement that will lead to a Palestinian state," she said.
"If construction resumes there will be very little territory on which to have that Palestinian state, that's what Palestinians have been saying from some months and years now."
But Steve Clemons of the New America Foundation public policy institute said he had been told by "senior officials from the White House that they had received informal communications and commitments from the Israelis that the settlement freeze would be extended".
"I don't think this would have come together, I don't think Mahmoud Abbas would have been able to sell it to his constituents, unless those informal commitments had been communicated."
Reacting to the comments from the PLO meeting, PJ Crowley, the US state department spokesman, told Al Jazeera: "We look forward to the start of direct negotiations.
"We understand that there are some difficult issues and we're anxious to get started."
Clinton said that the talks will be held without preconditions and will run for a year with a view to creating a separate Palestinian state.
"There have been difficulties in the past. There will be difficulties ahead. Without a doubt, we will hit more obstacles. The enemies of peace will keep trying to defeat us and derail these talks," she said.
talks about talks
December 2008: Palestinians suspend talks after Israel launches Gaza war. March 2010: Abbas agrees to indirect talks, then freezes them over settlements. May 2010: Indirect talks begin with a four-month timeframe.August 2010: US expected to announce resumption of direct talks.September 2010: West Bank settlement freeze scheduled to end on September 26.
Netanyahu, who has called for a return to direct talks without preconditions, reacted positively to the news, saying Israel wanted to conduct "serious and comprehensive talks" with the Palestinians.
"Reaching an agreement is a difficult challenge, but is possible," he said.
The announcement on Friday came as a surprise to many observers, who said that there had been little sign of the diplomatic breakthrough many believed was a prerequisite for a resumption of talks.
"You don't see that there are conditions ripe on the ground for talks. You don't see anything in terms of increased goodwill; in fact what you see on the ground rather is the opposite," Al Jazeera's Jacky Rowland, reporting from Jerusalem, said.
"One very much gets the impression that the driving reason why these talks are taking place, or are going to take place, is simply that the Americans want them to."
Ghaith al-Omari, a former adviser to the Palestinian negotiating team, said that the resumption of talks had been brought about by a "very skillful piece of diplomatic craftsmanship".
"They issued an invitation that both sides can spin to their own satisfaction," he told Al Jazeera.
"The Palestinians got a timeframe, the Palestinians got reference to the Quartet statements. So we see Abbas focusing on these aspects while Netanyahu is focusing on other aspects of the invitation."
The Palestinian Authority broke off direct talks with Israel in December 2008, when Israel launched a three-week war in the Gaza Strip.
Hamas, which controls the Gaza Strip, has criticised the decision to return to the negotiating table.
Ismail Haniya, the Hamas leader in Gaza, said "nothing has been achieved" to warrant the resumption of talks.
Haniya also said Palestinians should concentrate on national reconciliation before peace with Israel.
The Hamas and Fatah movements have been estranged for years, and Egyptian attempts at mediation over the last few months have produced little progress.