Israeli Foreign Minister Shimon Peres is claiming Israel should have agreed to Palestinian independence nearly a decade ago.
In a speech to 70 members of the Conference of Presidents of Major American Jewish Organizations, he indicated the current process has failed.
The comments come amid a fresh wave of violence from Palestinian suicide bombers and reprisal attacks by the Israeli army.
All of it could have been avoided, Mr Peres said, if the Palestinians had a state from the beginning.
"We cannot keep three and a half million Palestinians under siege without income, oppressed, poor, densely populated, near starvation," he said, adding that without a visible political horizon the Palestinians will not make peace with Israel.
"We thought that autonomy is basically, almost independence," Mr Peres said. "Today we discover that autonomy puts the Palestinians in a worse situation. We have to give them equal rights, equal recognition. We cannot run their lives, their economy."
Mr Peres and Palestinian Parliament Speaker Mr Ahmed Qureia have been working on a peace plan in three stages - a cease-fire, followed by Israel's recognition of Palestinian statehood in undefined borders and negotiations on a final peace deal within a year.
Israeli Prime Minister Mr Ariel Sharon and Defence Minister Mr Binyamin Ben-Eliezer have poured cold water on the plan, saying it is unrealistic.
AP