The United States, European Union, Russia and the United Nations - which comprise the quartet -- said settlements, demolition of Palestinian homes and Israeli confiscation of land were "steadily eroding the viability of the two-state solution."
"Israel should cease the policy of settlement construction and expansion, designating land for exclusive Israeli use, and denying Palestinian development," said the report.
"This raises legitimate questions about Israel's long-term intentions, which are compounded by the statements of some Israeli ministers that there should never be a Palestinian state," it added.
There has been growing alarm that ongoing violence and the construction of Jewish settlements on land earmarked to be part of a future Palestinian state are killing off prospects for a deal.
Since the beginning of the Oslo peace process in 1993, the settlement population has more than doubled, with a threefold increase in so-called Area C -- the most sought-after land in the West Bank, said the report.
There are currently at least 570,000 settlers living in the West Bank and east Jerusalem, which the Palestinians hope to make the capital of their future state. The United Nations has said settlements are illegal.
The report said that "regrettably," Palestinian leaders "have not consistently and clearly condemned specific terrorist attacks" while streets and squares have been named after Palestinians who have carried out the violence.
"The Palestinian Authority should act decisively and take all steps within its capacity to cease incitement to violence and strengthen ongoing efforts to combat terrorism, including by clearly condemning all acts of terrorism," said the quartet.
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