United Nations Secretary General Ban ki-Moon on Thursday urged Palestinians and Israelis to resume peace negotiations, declaring that failure to do so could destroy any chances of progress.

"In the absence of talks, confidence between the parties has diminished," the UN chief said at a meeting of the UN Committee on the Exercise of the Inalienable Rights of the Palestinian People in New York.

"Tensions have risen in East Jerusalem. People in Gaza and southern Israel continue to suffer from violence," he added. "If we do not move forward on the political process soon, we risk sliding backwards."

Ban reiterated that the international community opposed Israel's continued construction and presence in Arab East Jerusalem, and warned that settlement activity would prevent the achievement of a viable two-state solution.

"This is in no one's interest, least of all Israel's," he said. "Settlement activity undermines trust between the two parties, seems to pre-judge the outcome of the future permanent status negotiations, and imperils the basis for the two-State solution."

He added that Israel's activity in East Jerusalem - including demolitions of Arab houses, revocation of Palestinian identity cards, and construction - have not only "stoked tensions in the city, but also has the potential to endanger stability in the region."

"It bears repeating that the international community does not recognize Israel's annexation of East Jerusalem, which remains part of the occupied Palestinian territory," said Ban. "A way must be found, through negotiations, for Jerusalem to emerge as the capital of two states living side-by-side in peace and security, with arrangements for the holy sites acceptable to all."

Officials in Jerusalem slammed Ban's comments as one-sided, saying it was time the international body reevaluate its own approach and ask why it has failed to follow through with its own resolutions.

In particular, the officials were referring to the continued flow of arms between Hezbollah, Iran and Hamas.

Deputy Foreign Minister Danny Ayalon said Ban has misread the obstacles preventing a resumption of peace talks, adding that the failure was a result of conditions set by the Palestinians and Arab states.

U.S. launches new Mideast effort

Meanwhile, the U.S.' special Middle East envoy has launched a new effort aimed at restarting Israeli-Palestinian peace negotiations, just as President Barack Obama expressed pessimism about the prospects.

Already complicating envoy George Mitchell's mission was a new demand by Prime Minister Benjamin Netanyahu for an Israeli military presence in the West Bank to stop weapons smuggling, even after formation of a Palestinian state.

Mitchell met late Thursday with Netanyahu, whose office released a brief statement saying they discussed ways to move the peace process forward and that contacts would continue.

As Mitchell began his mission, Obama admitted that he overreached in the Middle East.

In an interview with Time Magazine published Thursday, Obama said "internal conflicts made it hard for the Israelis and Palestinians to restart talks, and I think that we overestimated our ability to persuade them to do so when their politics ran contrary to that."

He said Israel found it very hard to move with any bold gestures, while Palestinian President Mahmoud Abbas had Hamas looking over his shoulder.

"I think it is absolutely true that what we did this year didn't produce the kind of breakthrough that we wanted and if we had anticipated some of these political problems on both sides earlier, we might not have raised expectations as high," Obama concluded.

Before meeting President Shimon Peres earlier on Thursday, Mitchell pledged to soldier on. He said Obama's vision is a Palestinian state alongside Israel in peace. "We will pursue [that] until we achieve that objective," Mitchell said.

The envoy is set to meet with Palestinian officials in the West Bank on Friday.

Mitchell has been laboring without success for a year to get both sides back to the negotiating table, and Netanyahu's new demand made his mission even tougher.

Netanyahu said Israel must maintain a presence on the eastern side of a prospective Palestinian state to keep militants from using the territory to launch rockets at Israel's heartland.

The eastern side of such a state would be the part of the Jordan Valley that lies in the West Bank.

Abbas aide Nabil Abu Rdeneh rejected the demand. "The Palestinian leadership will not accept a single Israeli soldier on Palestinian land after ending the Israeli occupation," he told The Associated Press.

The Palestinians have refused to sit down with Israel until it stops all construction in the West Bank and east Jerusalem, saying it is eating up lands they claim for their future state. Israel, which captured both areas in the 1967 Six-Day War, has slowed settlement construction in the West Bank, but has applied no restrictions in east Jerusalem, which Netanyahu hopes to retain.

Israel also says negotiations should begin immediately with no conditions, but the Palestinians accuse Israel of heaping plenty of conditions of its own, including the demilitarization of a future Palestinian state, the retention of East Jerusalem and now, a military presence along Jordan's border.

The Israeli leader heads a coalition largely opposed to the sweeping territorial concessions that would be necessary to clinch a peace deal with the Palestinians. He himself had long refused to endorse the concept of Palestinian statehood, doing so only in June under intense U.S. pressure.