Tens of thousands of people have been killed in a war marked by widespread atrocities on both sides, and diplomats warned the collapse of the latest peace efforts could trigger "serious consequences" for the rival leaders.
"We suspend the peace talks until the two rebel factions sort out their differences," top government official Louis Lobong said, after meetings with President Salva Kiir.
South Sudan's civil war began in December 2013 when Kiir accused his former deputy Riek Machar of planning a coup, setting off a cycle of retaliatory killings that has split the poverty-stricken, landlocked country along ethnic lines.
On Tuesday however, top rebel generals said they had split from Machar, accusing him of seeking power for himself, and adding they would not recognise any deal agreed.
Obama has warned Kiir and Machar that if they failed to strike a deal the US will "move forward with a different plan, and recognize that those leaders are incapable of creating the peace that is required."
The war has been characterised by ethnic massacres and rape. Recent attacks have included castration, burning people alive and tying children together before slitting their throats.
Possible punitive measures could include an arms embargo and targeted sanctions including travel bans and asset freezes.
The latest round of talks opened on August 6, mediated by the regional eight-nation bloc IGAD, the Intergovernmental Authority on Development, as well as the United Nations, African Union, China and the "troika" of Britain, Norway and the US.
Envoys have said international patience has run out.
"Everything is on the table: arms embargo, sanctions targeting not only the military but also the political level, and an intervention force," one diplomat in Addis Ababa said.
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