Ban said in an opinion piece published in the New York Times that Israel cannot keep "lashing out at every well-intentioned critic" of its policies and that he had "pointed out a simple truth."
"Palestinians -- especially young people -- are losing hope over what seems a harsh, humiliating and endless occupation," he said in the editorial posted on the website late today.
At the same time, Israelis are reeling from near-daily attacks and "losing sight" of the possibility of a peace deal, he said.
The op-ed was the latest salvo from the UN chief on the Israeli-Palestinian peace process, which has been deadlocked since a US peace mission collapsed in April 2014.
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UN diplomats said privately that Ban was turning up the pressure to try to get peace talks moving again before he steps down as secretary-general at the end of the year.
Israeli Prime Minister Benjamin Netanyahu last week accused Ban of "encouraging terrorism" after the UN chief said it was understandable that the Palestinians were resisting Israeli military rule.
The UN chief urged Israel to make "significant shifts in policies toward the West Bank and Gaza" to support the Palestinian Authority with housing, water, energy, communications, agriculture and access to natural resources.
The Palestinians, for their part, must bring Hamas-controlled Gaza and the West Bank under a "single, democratic governing authority" and stop the construction of tunnels in Gaza used to wage attacks against Israelis.
Israel occupied Gaza in the 1967 war and pulled its troops and settlers out in 2005, but it still exercises control over most of Gaza's borders, waters and airspace.