On Friday, a second round of talks between Netanyahu and Kadima leader Tzipi Livni failed as Netanyahu said there would be no two-state solution.

"A final agreement will see the Palestinians having the full authority to run their lives," he reportedly told Livni. "But do you want them to have control of the air space, their own army, the right for them to make alliances with other states like Iran, or control over borders that would allow for weapons imports? I won't stand for it."

According to a source familiar with the situation, Netanyahu said he would "go on and take forward the talks with the Palestinians. But if they get full sovereignty it will pose a risk to the security of the State of Israel."

Sources say Netanyahu was not against the Palestinians having some autonomy in foreign affairs, such as embassies and diplomatic ties with any country in the world. But he deliberately avoided the use of the word "state" because it implied sovereignty and control over military affairs.