Foreign Secretary William Hague has said UK may abstain in a key vote on upgraded diplomatic status at the UN for Palestinians.
He said the UK would not oppose moves to recognise the Palestinians as a "non-member observer state".
But he said he needed a number of assurances, principally that the Palestinians would seek negotiations with Israel "without pre-conditions".
Palestinian diplomats said they had rejected the "unrealistic" demands.
The vote on upgrading the Palestinians from their current "permanent observer" status is seen as a symbolic milestone in Palestinian ambitions for statehood.
However, a yes vote would also have a practical diplomatic effect as it would allow the Palestinians to participate in debates at the UN and improve their chances of joining UN agencies, although the process was neither automatic nor guaranteed.
In a statement to MPs, Mr Hague set out the conditions he said were needed for the UK to back the move, suggesting they would not be "difficult" to achieve.
The first was an "indispensable" assurance had to be given by Palestinian President Mahmoud Abbas that the Palestinians were committed to return to negotiations with Israel without any conditions.
He said the Palestinians must also agree not to seek membership of International Criminal Court (ICC), as any move to extend the jurisdiction of the court over the occupied territories could derail any chance of talks resuming.
"Up until the time of the vote itself, we will remain open to voting in favour of the resolution, if we see public assurances by the Palestinians on these points," he said.
"However, in the absence of these assurances, the UK would abstain on the vote. This would be consistent with our strong support for the principle of Palestinian statehood, but our strong concern that the resolution could set the peace process back."
Mr Hague said he had made it clear to Mr Abbas that he believed pushing the issue to a vote was premature as the focus should be on a return to negotiations but the UK must make its position clear in the run-up to the decision.
The Palestinians' ambassador to the UK said Mr Abbas had rejected the British conditions in a phone call with the foreign secretary.
"He told Mr Hague the resolution would remain unchanged and called the conditions unrealistic and would provoke a public anger," Manuel Hassassian told the BBC.
The request not to join the ICC was "absolutely unworkable", he stressed, and entering negotiations without any strings attached meant abandoning the key demand that the construction of settlements on the West Bank must be frozen.
Mr Hassassian said he considered Britain's planned abstention as a "face-saving" gesture.
"The UK is keen on striking the right diplomatic balance; namely, it is committed to the two-state solution but it also wants to stick to the US line on the Palestinian statehood bid, which is totally opposing it."
Observers say the application is likely win approval in the 193-member UN General Assembly when it is put to a vote, because it needs only a simple majority to pass.
According to the Palestine Liberation Organisation (PLO), more than 130 countries now grant the Palestinians the rank of a sovereign state.
France, Spain and Norway are among those to be urging the General Assembly to raise the Palestinians' UN status.
The US and Israel oppose the move, citing concerns that the Palestinians are trying to seek full statehood via the UN, rather than through negotiation as set out in the 1993 Oslo peace accords under which the Palestinian Authority was established.
The Labour leadership have long backed the call for recognition, arguing it is an opportunity to "support the cause" of a two-state solution and would boost the position of moderate Palestinians.
In a short debate in the House of Lords - the UK Parliament's second chamber - to mark the 95th anniversary of the Balfour Declaration, independent peer Baroness Tonge said the Palestinians had been "totally betrayed" by successive British governments.
The 1917 Declaration, in the form of a letter by the then foreign secretary Arthur Balfour to Lord Rothschild, is regarded as the first significant assertion by a world power of their support for a Jewish "national home" in what was then known as Palestine.
Baroness Tonge, a frequent critic of Israel who quit the Lib Dems earlier this year, added: "By making our government's support for the UN bid conditional on Palestine not pursuing Israel through the ICC, is the government not admitting Israel has committed war crimes in Gaza and the West Bank and is seeking impunity for that country?"
But Labour peer Lord Turnberg said he thought the UN application was "more of a distraction than a help" to efforts for peace.