Israel and the Palestinians were on the verge of a deal to extend US-backed peace talks, Israeli media have reported, with a deal to free jailed Israeli spy Jonathan Pollard close to being finalised.

The deal, which could be finalised within "a few days", would see a final batch of Palestinian prisoners released in return for the US freeing Pollard, Channel 2 TV said.

It cited "sources in Washington" as saying that "the parties are to sign an agreement to extend negotiations beyond (their deadline of) 29 April."

"According to the source, the agreement will include the release of Palestinian prisoners, including Arab-Israelis, in exchange for the release of Jewish American spy Jonathan Pollard," the report said.

The release of the spy was not part of the initial conditions for the talks for the talks.

US intelligence agencies have long opposed any early release of Pollard, who pleaded guilty in 1987 to charges of spying for Israel and US officials said no decision on his release has yet been made.

Pollard, a US citizen who was granted Israeli citizenship in 1995, is due for parole next year.

Israeli and Palestinian negotiators were meeting in US-mediated discussions to try to break a stalemate in the crisis-hit peace talks, a Palestinian official said.

The Palestinians were pushing for the release of a final batch of prisoners, the official said, a commitment Israel reneged on at the end of March in a move which sparked the latest impasse.

An Israeli official told AFP on condition of anonymity that "Israel wants to return to talks and overcome the current crisis".

Israel refused to release 26 long-serving Palestinian prisoners, going back on a pledge it made at the beginning of talks that US Secretary of State John Kerry kick-started in July.

The Palestinians responded by abandoning their own commitment not to seek international recognition until the talks finished on 29 April, applying for membership of 15 international treaties.

Mr Kerry blamed Israel for the crisis, saying its 1 April approval of 708 Jewish settlement homes in east Jerusalem derailed plans for the prisoner release.

Meanwhile, a senior Israeli minister has urged Prime Minister Benjamin Netanyahu to annex Jewish settlements in the occupied West Bank, saying peace talks with the Palestinians were dead.

Economy Minister Naftali Bennett, who is head of ultra-nationalist Jewish Home party, wrote to the prime minister saying Israel should extend its sovereign territory to a number of major settlement blocs.

Mega settlements, such as Ma'ale Adumin, are built on land seized in the 1967 war, which is territory the Palestinians want for their future state.

Successive governments have said the blocs, illegal under international law, should remain part of Israel in any negotiated deal with the Palestinians.

The Geneva Convention states "the Occupying Power shall not deport or transfer parts of its own civilian population into the territory it occupies".

However, Israel argues that the settlements are not illegal. 

The US-backed negotiations came close to collapse last week amidst mutual recrimination and although the two sides are seeking to overcome the crisis, Mr Netanyahu has already started to impose punitive sanctions on the Palestinians.

"It is clear that the current process has exhausted itself and that we are entering a new era," said Bennett, urging Netanyahu to annex a number of large settlements.

"These are areas which enjoy a wide national consensus, have security implications and have historical significance for the State of Israel."

A high-tech entrepreneur and a former settler leader, Mr Bennett has called in the past for annexing a much larger part of the West Bank and is a long-time opponent of any deal that would grant the Palestinians a state.

Mr Netanyahu made no comment on Mr Bennett's request, but is likely to face strident calls from within his own rightist Likud party to annex the blocs, home to an estimated 350,000 Israelis, if the latest peace talks implode.

However, such a move would almost certainly set off a storm of international condemnation, and Israel's chief negotiator, Tzipi Livni, said Mr Bennett was acting like a "provocative child" who needed parental restraint.

"If you want to go totally crazy, keep it up until we can no longer make a deal and lose everything we hold dear," Ms Livni, who serves as justice minister, wrote on her Facebook page.

Israel has already annexed part of its 1967 gains: the Golan Heights that border Syria, and East Jerusalem, which the Palestinians want as their capital.

Neither move has been recognised internationally.

Construction of new Jewish homes in the West Bank rose 123% year-on-year in 2013, a surge that coincided with the resumption of talks.

Mr Kerry said this week that the announcement last week of tenders for 700 new homes in East Jerusalem was the immediate cause of the negotiations crisis.

An official in Mr Netanyahu's office said Israel was "deeply disappointed" by Kerry's remarks, signalling clear tensions in relations between the two allies.

The prime minister has pinned the blame on President Mahmoud Abbas for signing last week 15 international conventions, saying this broke his prior commitment not to take unilateral steps to bolster Palestinian statehood while talks were under way.

As initial punitive action, Mr Netanyahu ordered a partial freeze on contacts with the Palestinians.

However, the two negotiating teams were due to meet later to seek a way to prolong their talks beyond April.