Prime Minister Benjamin Netanyahu said on Sunday any deal on Gaza's future had to meet Israel's security needs, warning Hamas it faced "harsh strikes" if it resumed firing into the Jewish state.
With a five-day ceasefire due to expire late on Monday, negotiators returned after consultations to Cairo to seek an end to five weeks of hostilities that have killed more than 2,000 people.
Both sides say gaps remain in reaching a long-term deal that would keep the peace between Israel and militant groups in the Hamas Islamist-dominated Gaza Strip, and open the way for reconstruction aid to reach the battered enclave.
Late on Sunday, a Palestinian official said Israel's position in the talks, as presented to them by Egyptian mediators, were a "retreat from what had already been achieved and discussions had returned to square one."
The official, who was not named, told Egypt's official news agency MENA that Israel had toughened its stance and had placed "impossible" demands, particularly on security issues. He said the Palestinians would review the situation and would offer their response early on Monday.
"We are determined to achieve the demands of our people and foremost is ending the aggression and launching the rebuilding process and lifting the Israeli-imposed blockade of the Gaza Strip," MENA quoted the official as saying.
Moussa Abu Marzouk, a senior Hamas official at the talks, said there was no certainty the ceasefire would continue beyond its Monday night deadline.
"There are 24 hours left for the agreed calm period and it may not be renewed. The Palestinian delegation will not cede any of the rights of our people," he told a Hamas web site.
Hamas wants Israeli and Egyptian blockades of Gaza lifted, as well as the establishment of a seaport and airport, as part of any enduring halt to violence.
Israel, which launched its offensive on July 8 after a surge in cross-border Hamas rocket attacks, has shown scant interest in making sweeping concessions, and has called for the disarming of militant groups in the territory of 1.8 million people.
Netanyahu, in public remarks to his cabinet, said Hamas should not underestimate Israel's resolve to battle on.
"Only if there is a clear response to our security needs will we agree to reach understandings," he said.
"If Hamas thinks that through continued intermittent firing it will cause us to make concessions, it is mistaken. For as long as quiet does not return, Hamas will continue to absorb very harsh