Israeli Defence Minister Ehud Barak has called for a unilateral withdrawal from most of the West Bank if peace talks with the Palestinians fail.
In an interview with Israel Hayom, Mr Barak proposed uprooting dozens of Jewish settlements, although he said major settlement blocs would be kept.
There would also still be a military presence along the border with Jordan.
Negotiations on a two-state solution stalled in late 2010 following a dispute over settlement construction.
Palestinian Authority President Mahmoud Abbas has said he will not resume direct talks until Israel freezes all building work and accepts the ceasefire lines which existed before the 1967 Middle East war as the basis for the borders of a Palestinian state, with agreed modifications.
About 500,000 Jews live in more than 100 settlements built since the occupation of the West Bank and East Jerusalem. The settlements are considered illegal under international law, though Israel disputes this.
Mr Barak said it would be preferable to reach a peace deal with the Palestinians, but that after four years of deadlock, Israel had to "take practical steps to start a separation".
He told Israel Hayom that his plan for unilateral disengagement would see the dismantling of dozens of isolated settlements, but the retention of the settlement blocs of Etzion, Maale Adumim and Ariel, where 80% to 90% of the settler population lives.
"It will be a big achievement if we manage to keep them inside Israel's permanent borders," he said.
The remaining settlers would be given financial incentives to leave or be allowed to remain in their homes under Palestinian control for a "trial period" of five years, he added.
Militarily sensitive areas, such as the hills overlooking Tel Aviv's Ben-Gurion International Airport and the Jordan valley, would also be kept, according to Mr Barak's plan.
"The time has come to make decisions based not only on ideology and gut feelings, but from a cold reading of reality," Mr Barak said.
An aide to President Abbas rejected the proposals, saying they would make the establishment of a Palestinian state impossible.
"These settlement blocs are not isolated populations. They are connected communities, passing through the Palestinian land, which kills any geographical contiguity for a Palestinian state," the aide said.
Analysts said they believed the defence minister's comments were an attempt to differentiate his Independence party from its coalition partner, Prime Minister Benjamin Netanyahu's Likud party, ahead of the general election, which must be held by October 2013.
Mr Netanyahu resigned from a previous government in protest at the unilateral withdrawal of Israeli troops and settlers from the Gaza Strip in 2005.
The withdrawal is considered a failure by many Israelis because two years later the Islamist militant group Hamas, whose founding document commits it to the destruction of Israel, ousted the Palestinian Authority and President Abbas's Fatah movement from Gaza.
Hamas had won parliamentary elections in 2006 and had formed a unity government with Fatah.