Israeli and Palestinian negotiators are holding US-brokered peace contacts, but Ban said, "I am alarmed by the increasingly dangerous situation on the ground. There has been an escalation of violence and incitement."
He highlighted Israel's settlement surge in the occupied territories as "a cause for very grave concern" in a message for the international day of solidarity with the Palestinian people.
"Announcements of thousands of new housing units cannot be reconciled with the goal of a two-state solution and risk the collapse of negotiations," he said, calling for an end to all new settlements in the West Bank and East Jerusalem.
He said the Palestinians must overcome "divisions" between President Mahmud Abbas' Fatah faction and Hamas, the Gaza rulers, to boost the talks.
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"All parties must act in a responsible way and refrain from actions that undermine the prospects for successful negotiations," the UN secretary general said.
"We cannot afford to lose the current momentum of opportunity," Ban said.
Ban's message came out on the first anniversary of the UN General Assembly's recognition of the Palestinians as an observer state.