Islam Times reports from Telegraph: Refusing to stop building new settlements runs against a key condition set by the Quartet of Middle East mediators for talks to begin.
Officials said they would only respond favourably to an invitation to talks without preconditions, snubbing the Quartet. The Quartet is made up of the United Nations, the United States, the European Union, and Russia.
Israel's decision will put more pressure on the Palestinian leader, President Mahmoud Abbas, who had also demanded settlement building be frozen but looks likely to enter talks anyway.
Israeli officials say they expect a separate invitation will be issued shortly by the United States without preconditions, allowing the relaunch of the direct negotiations which were broken off when Israel forces invaded Gaza in December 2008.
The Quartet is expected to issue its call for the resumption of face-to-face talks in the coming days.
Its statement will reportedly call for Israel to halt settlement construction and agree to the creation of a Palestinian state based on the 1967 borders, with east Jerusalem as its capital.
The Israeli prime minister, Benjamin Netanyahu, and senior ministers decided to reject the Quartet terms of reference at a meeting on Sunday night.
"The Quartet declaration will likely be a fig leaf for stipulating preconditions on the part of the Palestinians, and this is unacceptable to us," a senior official said.
Since May, indirect talks have been conducted through the US envoy, George Mitchell, who has been shuttling between Jerusalem and Ramallah, the seat of the Palestinian authority.
They were made possible by a partial, 10-month moratorium on building which expires on September 26th.
The Arab League has already given Mr Abbas a green light to enter direct talks at a time he sees fit, but that decision will further undermine his position with more radical Palestinians, including Hamas, which runs Gaza.
Hamas and 10 other groups issued a statement in Damascus declaring their opposition to the resumption of direct negotiations.
A joint statement accused the US of backing Israeli plans to expand settlements, control Jerusalem and maintain the blockade on Gaza.