Israel and the United States are discussing a possible deal which could secure the release of US-born Israeli spy Jonathan Pollard as a way of salvaging the crisis-hit peace talks.

According to two separate sources close to the talks, Pollard's release is being discussed in the context of efforts to secure an extension of the peace talks with the Palestinians, although no decision has yet been made.

Pollard was arrested in Washington in 1985 and condemned to life imprisonment for spying on the United States on behalf of Israel.

His release is a major rallying point for the Israeli right but is also broadly supported across the political spectrum.

One of the sources said there was a proposal which could see Pollard freed before the week-long Jewish holiday of Passover, which begins in mid-April.

In exchange, Israel would agree to release a fourth group of Palestinian prisoners, which it recently blocked, and both parties would agree to a US proposal to extend the negotiations beyond an April 29 deadline.

Israel would also agree to free another group of Palestinian prisoners, but it would not include anyone convicted of anti-Israeli attacks.

Earlier on Monday, a Palestinian official said the Ramallah leadership had refused an Israeli proposal offering the release of 420 prisoners, mostly petty criminals, in exchange for an extension.

US peace efforts are teetering on the brink of collapse after Israel refused to free a group of 26 veteran Palestinian prisoners under an agreement which brought the sides back to the negotiating table in July 2013.

Furious Palestinian officials have warned that unless Israel changes its stance on the prisoner releases, it could signal the end of the talks.

"There is a possibility that Pollard's release will be part of a deal to extend peace talks but nothing final yet," an Israeli official was quoted as telling the diplomatic correspondent of Haaretz newspaper.

Separately, a US official told Haaretz that Netanyahu would have to make "big" concessions if he wanted to secure the release of the 59-year-old former naval analyst who is serving life for espionage.

Freeing Pollard could soften intense domestic opposition in Israel to a release of more Palestinian prisoners, among them 14 Arab Israelis, convicted of anti-Israeli attacks.