Ban Ki-moon, UN secretary-general, has said Israel's settlement policy is seriously undermining peace efforts by the international community.
He made the remarks during a visit to the occupied West Bank on Thursday, as Israelis and Palestinians launched formal talks on the terms of a Palestinian state, ending a five-year freeze.
The talks have been overshadowed by recent Israeli announcements on promoting plans for more than 3,000 new settlement apartments.
"I am deeply troubled by Israel's continuing settlement activity in the West Bank, including East Jerusalem," Ban at a news conference with Palestinian President Mahmoud Abbas in Ramallah.
"The settlement activity is deepening the Palestinian people's mistrust in the seriousness on the Israeli side towards achieving peace. It will ultimately render a two-state solution impossible."
For his part, Abbas said all issues of contention with Israel had been discussed, although he abided by an agreed news blackout.
"Until now we didn't speak about what happened [in the talks] and when there is something, we shall tell you," he said.
The Palestinians want a state in the West Bank, Gaza and East Jerusalem, occupied by Israel in 1967.
Israel has built dozens of settlements there that are now home to more than half a million Israelis and are deemed illegal by most of the international community.
The US hopes Israelis and Palestinians can reach a deal within nine months, though expectations on all sides are low.