Washington's top diplomat wrapped up a lightning Israel visit Tuesday but was expected to return within 24 hours as speculation grew that a jailed US-Israeli spy could be key to saving peace talks.

After flying in from Paris on Monday evening, US Secretary of State John Kerry met for two hours with Israeli Prime Minister Benjamin Netanyahu, before entering talks with Palestinian negotiators at his Jerusalem hotel.

Early Tuesday, he held a second two-hour meeting with Netanyahu, with sources close to the talks saying they discussed a deal to free Israeli spy Jonathan Pollard as a way of breaking the logjam in the negotiations.

US peace efforts are teetering on the brink of collapse after Israel refused to free a fourth and final group of 26 veteran Palestinian prisoners which would have completed an agreement that brought the sides back to the negotiating table in July 2013.

Furious Palestinian officials have warned that unless Israel changes its stance on the prisoner releases, it could signal the end of negotiations, which are in any case due to draw to a close on April 29.

US efforts are focused on getting the parties to agree an extension to the end of the year.

After his meeting with Netanyahu, Kerry was back on a plane heading to Europe for a NATO meeting in Brussels.

But a senior Palestinian source told AFP he would return within 24 hours for talks with Palestinian President Mahmoud Abbas.

"Kerry will fly to Europe today for previous engagements and will come back to meet the president tomorrow at noon [0900 GMT]," the Palestinian source told AFP. Kerry had been due to meet Abbas late on Monday but the meeting was cancelled.

Separate sources close to the negotiating teams confirmed that Washington is considering a proposal to release Pollard as a way to break the deadlock.

Pollard was arrested in Washington in 1985 and sentenced to life imprisonment for spying on the US.

"The emerging deal ... contains the following elements: the release of Jonathan Pollard before the Passover holiday [in mid-April] and the extension of the negotiations with the Palestinians into 2015," one of the sources told AFP.

He said the fourth batch of prisoners would be freed, "including Israeli Arabs," and Israel would also agree to free another 400 security prisoners not involved in deadly anti-Israeli attacks.

The release of Arab Israelis jailed for nationalist attacks has been bitterly opposed by many within Netanyahu's ruling rightwing coalition.

AFP