Israeli Prime Minister Benjamin Netanyahu, the key Israeli decision-maker, did not attend Sunday's prayer meeting at the Vatican and he refuses to deal with the Palestinian unity government, backed by Hamas Islamists, that Palestinian President Mahmoud Abbas swore in last Monday.

Netanyahu's handling of the now-moribund Palestinian peace negotiations drew criticism from both sides of his own coalition on Sunday, and one partner said relations with the United States had plunged to an all-time low.

The censure, aired at a showcase policy conference attended by foreign dignitaries as well as the country's senior politicians, exposed deep rifts in the government.

Finance Minister Yair Lapid, whose centrist Yesh Atid party is the second-biggest coalition member, said Israel had been too opaque about the extent to which it might cede the occupied West Bank to a future Palestinian state.

The administration of US President Barack Obama has blamed the diplomatic impasse on both Israel and Abbas, whose surprise reconciliation with rival Hamas Islamists in late April prompted Netanyahu to call off the peace talks.

Washington has since further jarred Israel by offering to work with the new Palestinian unity government. Netanyahu is shunning Abbas, demanding he first spurn Hamas.

Addressing the annual Herzliya Conference near Tel Aviv, Lapid said there was an "unprecedented crisis" in Israeli-US relations "brought about by problematic and sometimes disrespectful conduct on our part".

He faulted government funding for Jewish settlements in far-flung parts of the West Bank, which he saw going to the Palestinians in the future.

Reuters