The conflict has left tens of thousands dead and has been marked by widespread atrocities on both sides.
"We have now reached a critical juncture whereby participants of this phase will make decisions that may impact the destiny of the people of South Sudan," chief mediator Seyoum Mesfin said at an opening ceremony.
Delegates met in the Ethiopia capital Addis Ababa, under mediation from the regional eight-nation bloc IGAD, the Intergovernmental Authority on Development.
"We have not been able to count the number of dead," Seyoum said.
Diplomats have said repeatedly that patience has run out over the country's civil war.
"You have had enough time to consult, since the proposals are the very same issues that you have been discussing for the last 19 months," Seyoum said.
But the mood was far from friendly, with chief rebel negotiator Taban Deng saying the government in Juba had "lost all legitimacy" while his government counterpart, Nhial Deng Nhial, was dismissive of proposals that he said put Machar on a level footing with Kiir.
Kiir and Machar, who are expected to appear later in the process, effectively face an ultimatum, a "final best offer," according to one senior US administration official.
Failure to strike a deal could lead to a range of punitive measures including an arms embargo and targeted sanctions, including travel bans and asset freezes.
After the collapse of the last round of talks, mediators expanded involvement to create an "IGAD-plus" group.
It now also includes the United Nations, five more African Union nations from across the continent -- Algeria, Chad, Nigeria, Rwanda and South Africa -- as well as China and the "Troika": Britain, Norway and the US.
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