A frustrated US secretary of state demanded Thursday action from recalcitrant Israeli and Palestinian leaders, saying it was time for them to demonstrate leadership in the crisis-hit peace talks.

But John Kerry acknowledged in Algiers that negotiators from the two sides had made "progress" in lengthy overnight talks in Jerusalem, also attended by the Americans.

More than a year of intensive Kerry shuttle diplomacy appeared to be on the brink of collapse this week after Israel announced a fresh wave of settlement tenders and the Palestinians resumed moves to seek international recognition for their promised state.

Washington expressed disappointment, describing them as "unhelpful, unilateral actions," but insisted diplomacy still had a chance.

Speaking Thursday morning during a visit to Algeria, Kerry threw down the gauntlet to both sides, telling them it was time for compromise at what he called a "critical moment" in the peace talks.

"You can facilitate, you can push, you can nudge, but the parties themselves have to make fundamental decisions to compromise," he said.

"The leaders have to lead, and they have to be able to see a moment when it's there," he added, showing signs of frustration after his months-long peace efforts appeared to be in tatters.

But Kerry said negotiators had made progress in trying to chart a path forward during a meeting that ran until 4:00 am.

"There is still a gap and that gap needs to close fairly soon."

Ahead of the talks between US special envoy Martin Indyk, chief Israeli negotiator Tzipi Livni and her Palestinian counterpart, Saeb Erakat, Kerry had spoken by phone with Israeli Prime Minister Benjamin Netanyahu and Palestinian president Mahmud Abbas, a US official said.

Kerry said he would speak to both leaders again on Thursday.

"We are urging them to find the compromise that is critical to being able to move forward," he said. "The fight right now, the disagreement.. (is about) what you need to do in order to be able to continue to negotiate."

The current crisis was triggered by Israel's refusal to release 26 Palestinian prisoners at the weekend.

In response the Palestinians formally requested accession to several international treaties in a bid to unilaterally further their statehood claim.

The overnight marathon meeting "focused on the necessity of releasing the prisoners," a Palestinian official told AFP on condition of anonymity.

The official said that the applications for accession to several international treaties were "irreversible".

Each side accused the other of violating undertakings given when the current talks were launched under Kerry's sponsorship last July.

"The ball is in Israel's court now. It should release the prisoners," former Palestinian negotiator Mohammed Shtayeh told AFP.

The moves dealt a hammer blow to Kerry's frenetic efforts to broker an extension of the negotiations beyond their original April 29 deadline.

Despite the treaty move, Palestinian foreign minister Riyad al-Malki insisted that Abbas remained committed to the US peace efforts.

"This action does not detract from the importance of negotiations. We are still committed to these talks," he said Wednesday after presenting the requests.

UN Middle East peace envoy Robert Serry confirmed receiving them, with a spokesman for the secretary general saying they would review them to consider the "appropriate next steps."

The first treaty the Palestinians applied to was the Fourth Geneva Convention, which holds huge symbolic importance as it provides the legal basis of their opposition to Israeli settlements in the occupied territories.

In Israel, there was surprise and anger over the Palestinian move.

"The Palestinians have returned to a diplomatic intifada," one political official told Yediot Aharonot newspaper on Thursday, using the Arabic word for uprising.

Pro-government Israel HaYom daily said security officials did not believe the Palestinians wanted a breakdown of the talks.

"The Palestinians currently have no vested interest in a breakdown of the negotiations. Messages in that vein were relayed in talks that were held between security officials from both sides," it said.

It also said efforts were underway to compile a list of more prisoners who could be freed should the sides agree to extend the talks.

It added that top officials agree that the potential repercussions for Israeli security interests of a collapse in talks "will be far greater than the price that Israel will be required to pay for extending the negotiations for another period of time."