Herzog made the comments while laying out his new security and diplomatic initiative that has caused waves in Israeli politics and sparked criticism from within his own party.
His plan comes amid four months of Palestinian knife, gun and car-ramming attacks targeting Israelis -- violence that Herzog says amounts to a new "intifada," or uprising.
The head of the Labour-led Zionist Union coalition said he still wants a two-state solution, but does not believe Israeli Prime Minister Benjamin Netanyahu and Palestinian president Mahmud Abbas are capable of a breakthrough.
As a result, he proposes separating Palestinian areas on the outskirts of Jerusalem from the city itself and completing construction of Israel's controversial separation barrier already walling off much of the occupied West Bank.
Herzog said the Palestinians must also be given more civilian authority in the West Bank itself as part of "confidence-building measures", though he stressed the Israeli army would continue to operate anywhere it sees necessary in the territory.
Beyond that, he wants a security conference including "all moderate parties in the region" to tackle a range of issues in the Middle East.
"I believe that we have to be realistic," Herzog said at a news conference to unveil his initiative to foreign journalists.
"And I believe that reality calls right now to understand that, tomorrow, peace is not around the corner. What needs to be done is separating from the Palestinians as much as possible. This is taking our fate in our own hands."
He said his initiative was aimed at preserving the two-state solution while recognising progress cannot be made until the violence stops. He argued that "no other party or leader has presented a plan that is realistic."
Herzog's Labour adopted his proposals on Sunday, though some from within the party and other leftwing politicians say they amount to giving up on negotiations and moving too far to the right in hopes of gaining political ground on Netanyahu.
Netanyahu finished firmly ahead of Herzog's Zionist Union in March 2015 elections and now heads one of the most rightwing governments in Israeli history.
But he has faced criticism over the government's inability to halt the wave of Palestinian attacks.
Israeli-Palestinian negotiations have been at a complete standstill since peace talks collapsed in April 2014.
Signup to our newsletter and follow us on Facebook and Twitter!
A wave of violence that erupted in October has claimed the lives of 166 Palestinians, 26 Israelis, a US national, an Eritrean and a Sudanese.
Most of the Palestinians were killed carrying out attacks, while others died during clashes and demonstrations.
Some analysts say Palestinian frustration with Israeli occupation and settlement building in the West Bank, the complete lack of progress in peace efforts and their own fractured leadership have fed the unrest.
Israel blames incitement by Palestinian leaders and media as a main cause of the violence.
Herzog's plan calls for preserving the main settlement blocs in the West Bank and encompassing them within the separation barrier, with the understanding that land swaps could be negotiated later.
Wildcat settlements in the West Bank must be dismantled, said Herzog, who recently discussed his ideas separately with US Secretary of State John Kerry and French President Francois Hollande.
The barrier would also divide the Palestinian areas on the outskirts of Jerusalem from the city itself, though workers would still be allowed in through a permit system.
"This is something that you supervise," he said.
"It is not a 17-year-old getting up in the morning, walking to another neighbourhood and stabbing a 16-year-old."
Herzog also took a shot at Netanyahu, who on Tuesday while visiting Israel's eastern border with Jordan pledged to build a fence "surrounding the whole country" and adding "In the neighbourhood in which we live we need to protect ourselves from predatory beasts."
The opposition leader asked whether "Netanyahu wants to become Herzog" by also speaking about building fences.
In parliament later Netanyahu returned fire, accusing the opposition leader of making a U-turn and belatedly adopting the premier's own thinking.
"How can we trust your judgement on how to deal with the threats around us when you only realise what's going on here after a delay of years?
"Decide whatever you want, but for God's sake try and stick it to it for a week at least," Netanyahu said.