"The Israeli and Palestinian people face a shared fate on shared land. There is no erasing the other," Ban told a UN committee on Palestinian rights.
He called on the parties to "step back from the brink and find the path of peace before hope and time run out."
His comments reflected international alarm over the spate of violent attacks in east Jerusalem and the deadlock over peace talks that are fueling fear of another flareup after the 50-day war in Gaza earlier this year.
The lack of peace prospects coupled with Israel's ongoing campaign to build settlements on occupied territory are chipping away at the stated UN goal of a two-state solution in which Israel and a new state of Palestine would co-exist.
Ban said Israelis and Palestinians appeared to be "losing any sense of connection" and that "when that goes, it is not far over the precipice."
With no political solution in sight, governments and parliaments in Europe are moving toward Palestinian recognition, with France's National Assembly set to debate a non-binding resolution on Friday, followed by a vote on December 2.
That follows Sweden's announcement that it will recognize Palestine and non-binding votes in the British and Spanish parliament in favor of recognizing Palestinian statehood.
"Governments and parliaments are taking action. That momentum will grow," said Ban.
ISRAEL BERATES EUROPE
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Speaking at the UN General Assembly, Israel's ambassador railed against European governments for "failing us again," singling out Sweden's "historic mistake."
European parliaments voting to recognize Palestine are "giving the Palestinians exactly what they want -- statehood without peace," said Ron Prosor.
"By handing them a state on a silver platter, you are rewarding unilateral actions and taking away any incentive for the Palestinians to negotiate or compromise or renounce violence."
The Palestinians are still planning to formally submit to the UN Security Council a draft resolution calling for an Israeli withdrawal from all occupied territory in 2016.
Despite Palestinian statements that the text would come up for a vote in November, Palestinian representative Riyad Mansour told AFP no date had been set for the draft to be discussed at the 15-member council.
France, meanwhile, is leading a European initiative to try to agree on a new draft resolution that would set out parameters for a return to Israeli-Palestinian peace talks, diplomats said.
It remains unclear whether that effort will yield results.
"We, as the international community, must assume responsibility for what is a collective failure to advance a political solution for the Israeli-Palestinian conflict," said Ban.
"The mindless cycle of destruction must end. The virtuous circle of peace must begin."