"Israel is practising a policy of blackmail and linking its agreement to releasing the fourth batch of prisoners with the Palestinians accepting to extend the negotiations," the official said following a late-night meeting in Jerusalem between the two negotiating teams.
His remarks were made as US Secretary of State John Kerry was heading to Israel from Paris in a bid to prevent the collapse of the crisis-hit talks.
US peace efforts took a major blow at the weekend when Israel refused to free a group of 26 veteran Palestinian prisoners under an agreement which brought the sides back to the negotiating table in July 2013.
"Israel made a proposal which was refused by the Palestinians," the official told AFP, describing the proposal as "weak".
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In exchange for Palestinian agreement to continue the talks, Israel had offered to free the fourth batch of detainees and to releasing another 420 others.
But that number would only involve those serving light sentences for minor offences and would not include sick detainees, nor women and children.
The Palestinians are understood to have several conditions for extending the talks with Israel, including the release of more security prisoners and a freeze on Israeli settlement construction which has continued freely over the past eight months of talks.
"The proposal includes a partial settlement freeze in the West Bank but excludes (annexed) east Jerusalem, and would include continued building in areas where tenders have already been published," he said.