Netanyahu's office refused comment. But on the radio, Meridor said the government was sending mixed signals to the world by speaking in favor of Palestinian independence while settling Israelis on lands claimed by the Palestinians.
He said Israel should limit construction to major settlement "blocs" and existing Jewish settlements in east Jerusalem, and halt construction in outlying areas. Israel is expected to keep these settlements under any future peace deal.
"There is a lack of consistency between our claim of wanting two states ... and the fact that we don't limit building to the blocs only," he said. By sending this mixed message, "we cast doubt on our intentions and statements, and this is costing us a very high price."
Meridor stressed that establishment of a Palestinian state is in Israel's interests. Without a partition, most demographers believe that the Arab population under Israeli control could soon outnumber Jews.
The Palestinians have warned this could turn Israel into an "apartheid-style" state with a Jewish minority ruling over a disenfranchised Arab majority. The Arabs would turn their struggle away from independence and instead seek equality in a single mixed state.
A recent report by the anti-settlement watchdog group Peace Now found that nearly 40 percent of settlement construction under Netanyahu took place deep inside the West Bank.
Netanyahu, who is building a new coalition government following elections last month, has pledged to revive peace efforts in his new term and is courting centrist parties to join him. But he has given no sign that he is planning to soften his key positions on borders and settlement construction.
Ishtayeh said the Palestinians would not budge on their demands for a settlement freeze or their insistence that the 1967 borders remain the baseline for negotiations. He also ruled out an interim agreement while final borders can be worked out.
This could signal tough times ahead for the Obama administration. Newly sworn-in U.S. Secretary of State John Kerry is expected to visit Israel, the Palestinian territories and other countries in the region this month ahead of Obama's trip.
In a separate development, a Gaza man who carried out the longest-ever hunger strike by a Palestinian prisoner returned home.
Akram Rikhawi ended his 103-day hunger strike last July in exchange for Israel's pledged to release him five months earlier than his scheduled release in June.
Rikhawi, 40, who claimed to be suffering from asthma and diabetes, was taken to a hospital. He served a nine-year sentence for transporting suicide bombers.
"I am happy to be back home after this long suffering. It's a victory for prisoners who are fighting with their empty stomachs," he told reporters.
Associated Press writer Daniel Estrin in Jerusalem and Ibrahim Barzak in Gaza City, Gaza Strip, contributed to this report.
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