William Hague warned today that the window of opportunity for a two-state solution to the Israeli-Palestinian conflict was closing and failure by the two parties to reach agreement would be a "serious setback".

Speaking at the end of a two-day visit to Israel and the Palestinian territories, after visiting Jerusalem's Holocaust memorial, Yad Vashem, the foreign secretary urged Israel to renew its freeze on settlement construction to allow direct talks between the two parties to resume.

"There are many important issues, but this is one that has the potential to get direct talks going," he said. The British government wanted Israel to renew the moratorium on building, and he had "made his views clear" to Israeli politicians and officials during his visit, he said.

Hague met the Israeli prime minister, Binyamin Netanyahu, and foreign minister, Avigdor Lieberman, as well as the Palestinian prime minister, Salam Fayyad, during his visit.

"I am very worried that the window of opportunity is closing. There is real urgency to that," he said. The current talks were the third attempt in a decade to reach a comprehensive settlement and a two-state solution.

"If they don't succeed there will be a loss of hope. We must never give up trying, but [to fail] would be a serious setback," Hague said.

Direct negotiations began in early September but stalled shortly afterwards when the 10-month partial freeze on construction in settlements expired. The Palestinians insist they cannot negotiate on the boundaries of a future state while Israel continues to build and expand settlements on Palestinian land. All settlements are illegal under international law.

Commenting on the swift collapse of the talks, Hague said it had been right to try to get momentum going. "The early session of the talks were held in an atmosphere of great sincerity," he said. "The UK wants to see a fresh moratorium because the prize here is enormous, of long-term peace. The price being asked to get back into those talks ... is well worth paying."

He indicated that the UK would prefer a substantial extension to the freeze rather than the 60 days demanded by the US. "We don't want to come back to this issue every few months," he said, but he added that the UK was "not managing that process".

Alternatives to a negotiated settlement of the conflict were "difficult", he said. Asked whether the UK would back a tentative plan by the Palestinians to ask the UN security council to recognise a Palestinian state on the pre-1967 borders, he said: "It can be a false hope to think there is a good plan B or plan C. I would discourage this at this moment."

Hague's first visit as foreign secretary to Israel and the Palestinian territories was in danger of being marred by a row over attempts to obtain warrants in the UK for the arrest of Israeli politicians for alleged war crimes.

A statement issued after Hague's meeting with Netanyahu this morning said Israel welcomed the "clear commitment" by the UK to amend the law on universal jurisdiction under which such warrants were issued.

It added that the next "strategic dialogue" meeting between the two countries, which Israel had postponed in protest, would "take place very soon, in Israel".

Hague described the episode as "a little frustrating", but the difficulties had now been overcome. It had been, he said, "a mistake" on behalf of the Israeli foreign ministry rather than intentional.

Hague also courted controversy by meeting leaders of unarmed protests against the Israeli occupation in West Bank towns and villages in Ramallah on Wednesday. According to the Popular Struggle Co-ordination Committee, the foreign secretary gave "an unequivocal show of support in the face of ongoing Israeli repression".

Today, Hague said there was no contradiction between being a friend of Israel and a friend of the Palestinians.