The Israeli government was prepared to extend the settlement freeze by three months but the American administration decided at the last moment to change course, Prime Minister Benjamin Netanyahu said this week.
In an appearance before the Knesset Foreign and Defence Affairs Committee on Monday, Mr Netanyahu said that despite reports of his government's opposition to the American demands, he had been prepared to agree to a second settlement freeze in order to enable a resumption of peace discussions with the Palestinian Authority.
"In the end, the Americans were those who decided not to go down that road," he said, "in my opinion, quite rightly. They wanted instead to return to a framework of talks where we try to minimise the differences between the two sides."
Mr Netanyahu denied reports that the Obama administration had decided to back down from its demand that Israel agree to halt settlement activity again due to Israel's reluctance to do so.
He claimed that he was not opposed to a two-state solution and that "even in 1996 I proposed a 'minus-state' for the Palestinians".
Diplomats are trying to start a new round of indirect talks
After the committee meeting, one Israeli diplomat who was closely involved in the negotiations said that "the Americans would have gone for the settlement freeze if Israel had agreed to it earlier and with less conditions and if the Palestinian Authority had also been more flexible. But by the time Netanyahu came around, they had already realised that the settlements was a thorny subject that could not be solved at such an early stage.
"Also, they hoped that it may force Netanyahu to change his coalition and cast away some of the right-wing parties, but they saw that was not happening and decided to find other ways to take the process forward."
American diplomats, headed by former senator George Mitchell, are currently trying to lay the foundations for a new round of indirect talks between the sides.
One go-between upon whom they seem to rely on much less now is Labour Party leader, Defence Minister Ehud Barak, who for the past two years was seen as the Americans' favourite Israeli.
Mr Barak was in Washington at least once a month, meeting the administration's most senior officials, and promising that he could deliver a more pragmatic Israeli approach.
Now that the talks are bogged down, diplomatic sources are saying that the Obama administration and especially State Secretary Hillary Clinton are "deeply frustrated" with Mr Barak, who "did not fulfil any of his promises" and do not plan to extend him preferential treatment in the foreseeable future.
The Defence Minister is in trouble also within his own party. This week all senior Labour ministers threatened that if there is no progress in the diplomatic process in the next few months, they will insist on the party leaving the coalition.
Trade and Industry Minister, Benjamin Ben-Eliezer, who is seen as one of the most powerful figures in the party, said on Sunday that "if there is no progress we must leave the government" and promised to lead the departure himself by April.