US Mideast envoy George Mitchell pressed the two-state solution on Thursday to sceptical officials in Israel, where hawkish new Prime Minister Benjamin Netanyahu opposes a Palestinian state.

"US policy focuses on the two-state solution," Mitchell told reporters after holding talks in Jerusalem with Foreign Minister Avigdor Lieberman, who has refused to endorse the US-sponsored Annapolis peace process between Israel and the Palestinians.

In response, Lieberman said that "the peace process has reached a dead end" and that "the new (Israeli) government will have to formulate new ideas and approaches," according to a statement from his office.

"The traditional approach has so far led to no solutions or results," Lieberman said.

It marked the latest comments that could set Israel on a collision course with its most important ally, as Washington insists on the principle of a Palestinian state and Netanyahu refuses to endorse the plan.

Mitchell flew into Israel late Wednesday in his first trip to the region since Netanyahu assumed his post at the head of a largely right-wing cabinet that has sparked concern over the fate of troubled peace talks.

"In the case of the Israeli-Palestinian conflict, we believe that the two-state solution, two states living side by side in peace, is the best and the only way to resolve this conflict," Mitchell said in Morocco on Tuesday.

Underscoring the divide with Washington, Israeli Interior Minister Eli Yishai told reporters that, "In the present circumstances, one has to work not for two states for two people, but for two economies for two people."

"Mr. Mitchell knows that imposing the region to a virtual dialogue can have inverse results," he said.

Netanyahu says that the economy in the occupied West Bank must be improved before any other steps are taken in the staggering Middle East peace process.

Lieberman — slammed by critics as a "racist" for his anti-Arab diatribes — has also sparked concerns by declaring as soon as he assumed office that the new cabinet was not bound by the US-backed 2007 agreement to relaunch talks with the Palestinians.

Israel has also committed itself to the principle of a Palestinian state under the 2003 international "roadmap" for peace plan, which included a series of steps for Israelis and Palestinians to follow, eventually resulting in negotiations over core issues and the creation of the state of Palestine.

The plan has made little progress since its launch by the Middle East Quartet — the European Union, Russia, the United Nations and the United States.

Under a deal reached with Palestinians in Annapolis, Maryland, the two sides agreed to jump to the final phase of the roadmap and resume negotiations on final status issues while implementing the other stages of the plan.

Mitchell was also to hold talks with opposition leader Tzipi Livni during the day before meeting Netanyahu in the evening for dinner.

He was to travel to Ramallah in the occupied West Bank on Friday for meetings with Palestinian president Mahmud Abbas, who has insisted that the new Israeli cabinet commit itself to a two-state solution before the two sides can resume any talks.

Mitchell is a former US senator who played a key role in reaching the 1988 Good Friday accords that ended decades of violence in Northern Ireland.