The Palestinian Authority is considering cutting off its diplomatic contacts with Israel and unilaterally declaring statehood, the Arabic-language a-Sharq al-Awset daily reported on Friday.

"In light of the crisis we have encountered in talks with Israel, the Authority is testing a number of options," one Palestinian official told the daily. According to the report, the Palestinian Authority is also re-evaluating how to proceed with consolidating its security services.

Salah Rafat, a member of the Palestine Liberation Organization (PLO) council told the daily that "The Palestinian leadership will be able to make a clear and serious decision regarding the peace process," following trilateral talks in Washington next week.

U.S. Secretary of State Condoleezza Rice said on Friday there was still time to reach a peace deal between Israel and the Palestinians by the end of 2008.

Rice said the trilateral peace talks next week between the United States, Israel and the Palestinian Authority should be closed to offer the best hope of progress.

Rice said the latest round of talks which began in Annapolis in the United States in November 2007 had laid a "firm foundation on which these two parties can finally end their conflict."

"There is still time for them, in accordance with the Annapolis, to reach agreement by the end of the year and we will keep working towards that goal," Rice told a news conference in Perth in western Australia on Friday.

The United States revived Palestinian statehood negotiations between the Israelis and the Palestinians at a conference in Annapolis, Maryland, last November, with the hope of completing a deal by the time President George W. Bush leaves office.

But disputes over settlement expansion in the West Bank land, the corruption scandal involving Prime Minister Ehud Olmert, Palestinan leader Mahmoud Abbas' own political troubles, and security issues have all undercut U.S. efforts.

Rice plans to host peace talks between chief Palestinian negotiator Ahmed Qureia and his Israeli partner, Foreign Minister Tzipi Livni, in Washington on July 30.

Rice said the Washington talks should remain confidential, adding that the most successful peace talks between Israel and Palestine occurred in Oslo and nobody even knew they were talking.

"We won't be providing details of what goes on in the trilateral. The Israelis and Palestinians have their first serious peace process in seven years and they are discussing very sensitive and difficult issues," said Rice.

"I think they are wise to negotiate seriously, to work with each other to see if they can overcome differences, without having a daily accounting of how well they are doing or how badly, or who is up and who is down," she said.

"The work now is to keep pressing ahead, but pressing ahead in a way that preserves the workability of this process and that really means preserving the confidentiality of this process."