Last-ditch US efforts to rescue peace talks with the Palestinians are meeting tough resistance within Israel's governing coalition, with the far right threatening to quit over the mooted concessions.

Under huge US pressure to salvage the peace process, Israeli Prime Minister Benjamin Netanyahu was on Friday facing the threat of his cabinet falling apart.

Israeli and Palestinian negotiators met Thursday under the auspices of US envoy Martin Indyk nearly two weeks after the talks hit fresh crisis when Israel refused to release a final batch of prisoners, and Palestinians retaliated by seeking accession to 15 international treaties.

Israel then said it would freeze the transfer of taxes it collects on behalf of the Palestinian Authority (PA).

Despite the escalations, Israeli media reported a possible deal under which Arab-Israelis would be part of the fourth batch of prisoners still to be freed under commitments made when the US kick-started the peace negotiations last July.

In return, the Palestinians would agree to extend the talks beyond their April 29 deadline and Washington would release American-born Israeli spy Jonathan Pollard, the reports said.

State Department spokeswoman Jen Psaki called speculation over a deal "premature", and also said no decision had been reached on Pollard.

But Israeli Economy Minister Naftali Bennett, who heads the far-right Jewish Home party, threatened to pull his party out of the coalition if such a deal was reached.

"If the government proposes this deal to us, the Jewish Home party will pull out of the coalition," he said in a statement after the tripartite meeting.

If Bennett's party of 12 MPs quit the coalition, Netanyahu would have only 56 seats, four short of the 60 necessary in the 120-seat parliament, forcing either a search for a new coalition partner or fresh elections.

Officials from Netanyahu's Likud party dismissed Bennett's threat, telling media that "nobody is being held in the coalition against their will", and noting they were already familiar with Bennett's tactic of "making idle threats he knows will never materialise".

Journalist and political commentator Yossi Elituv said the only thing that would cause Bennett to leave the coalition would be if he were "kicked out".

His attitude is "to be in the government, threaten to leave and never quit", he told AFP.

The real threat comes from within Netanyahu's own Likud party.

Deputy foreign minister Zeev Elkin said a deal including a settlement construction freeze and release of prisoners, after the Palestinians applied to international institutions, "could shock the political system and force Israel into new elections".

Zehava Galon of the left-wing Meretz party said on Friday that "there was only one thing currently less reliable than Bennett's threats to leave over the negotiations -- the negotiations themselves".

One way for Netanyahu to maintain his coalition if the Jewish Home left would be with the Labour party, which currently heads the opposition.

Elituv said Netanyahu and Labour leader Issac Herzog "were dying" to form a new coalition, "but it's not up to them".

After Israel announced it would be freezing the transfer of taxes it collects for the PA, Palestinian chief negotiator Saeb Erakat lashed out, calling the move "Israeli hijacking and the theft of the Palestinian people's money".

Even as tensions rose, there still appeared to be a determination to continue the peace process, none more so than with Washington, which risked seeing an entire year of intensive work disappear, wrote Sima Kadmon in Israel's mass-circulation Yediot Aharonot newspaper.

"Despite the evasive games, it is too soon to eulogise the prisoner deal or bury the negotiations, and mainly it is too soon to talk about early elections," she wrote.