Speaking alongside her Israeli counterpart, Rice said she was "heartened" that talks launched at a U.S.-sponsored peace conference late last year were "serious and intensive." At the time, the sides said they hoped to reach a final peace deal before President Bush leaves office in January.
Rice is on her seventh trip to the region since talks were relaunched. While Israel and the Palestinians say all key issues have been under discussion, there has been no word on agreements or breakthroughs.
Rice offered no concrete examples of progress, and she did not mention the year-end target for an agreement. Deadlocked on core issues, Israel and the Palestinians have acknowledged in recent months they are unlikely to meet the timeline.
Israel has voiced concerns that the moderate government of Palestinian President Mahmoud Abbas is not doing enough to crack down on militant groups in his West Bank stronghold. It also says it cannot carry out any deal until Abbas regains control of the Gaza Strip from the Islamic militant group Hamas, which violently seized power of the coastal area in June 2007.
The Palestinians, meanwhile, have complained about continued Israeli construction in the West Bank and east Jerusalem - the Palestinians claim for a future independent state. Israel captured both areas in the 1967 Mideast war.
Under the "road map," the international peace plan that serves as the basis of the peace talks, Israel promised to halt all settlement construction. But it has continued to build thousands of homes in areas it hopes to retain under a final peace deal.
Rice said the Israeli construction has threatened to undermine the talks.
"I think that it is no secret, and I've said it to my Israeli counterparts, that I don't think the settlement activity is helpful to the process," she said. "What we need now are steps that enhance confidence between the parties and ... anything that undermines confidence between the parties ought to be avoided."
CBS News correspondent Robert Berger reported that Rice was responding to a report by Israel's dovish Peace Now movement, which said that construction in the settlements has more than doubled this year.
Peace Now released a report Tuesday saying that while talking peace with the Palestinians, Israel's government has dramatically ratcheted up its construction in the West Bank.
Some 2,600 new homes for Israelis are currently under construction in the West Bank - an increase of 80 percent over last year, Peace Now said.
In east Jerusalem, which Palestinians want as the capital of their future state, the number of new government bids for construction has increased from 46 in 2007 to 1,761 so far this year, the report said.
Palestinians say the construction undermines the talks and prejudices a final peace deal. But Israeli Foreign Minister Tzipi Livni, Israel's chief negotiator, said the construction would not affect the peace talks.
"In the end of the day, the role of the leaders is to try to find a way to live in peace in the future, and not to let any kind of noises that relate to the situation on the ground these days to enter the negotiation room," she said.
She said the Palestinians should not "use it as an excuse, and I know they are not using it as an excuse, but I understand their frustration sometimes."
After meeting Livni alone, Rice was holding a joint meeting with Livni and the chief Palestinian negotiator, Ahmed Qureia, before heading to the West Bank for talks with Palestinian President Mahmoud Abbas.
Earlier, Rice met alone with Prime Minister Ehud Olmert for an hour, discussing the peace process and other regional issues, said Israeli government spokesman Mark Regev. Israel's government "will continue our efforts to reach a historic agreement before the end of the Bush administration," Regev said.
Facing a string of corruption investigations, Olmert announced last month that he will step down after his ruling Kadima Party chooses a new leader in September. But under Israel's legislative rules it could be months before a new Israeli prime minister takes office, leaving Olmert in place. He continues to push forward with peace efforts.
Olmert and Abbas are slated to meet Sunday for another of their regular meetings, a Palestinian official close to the negotiations said. He spoke on condition of anonymity because the meeting had yet to be officially announced. Regev would not confirm the date.