Palestinian and Israeli deaths this year have surpassed last year's figures and are at their highest level since 2005, UN Middle East envoy Tor Wennesland said on Monday.
More than 200 Palestinians and almost 30 Israelis have been killed in the occupied West Bank and Israel this year, Mr Wennesland told the UN Security Council in a briefing.
"Palestinians and Israelis are killed in near daily violence – including just hours before this briefing when another fatal shooting attack killed an Israeli in the West Bank," he said.
The UN official said the violence was "fuelled and exacerbated by a growing sense of despair about the future".
On Tuesday, Israeli forces killed a 17-year-old boy while searching for suspects in a fatal shooting of an Israeli father and son on Saturday in the Palestinian town of Huwara.
On Monday, an Israeli settler was shot dead and another was wounded in Hebron.
Mr Wennesland cited the current political climate as cause for these escalations.
"The lack of progress towards a political horizon that addresses the core issues driving the conflict has left a dangerous and volatile vacuum, filled by extremists on both sides," he said.
Mr Wennesland said the parties of the conflict had taken "some actions" towards improving the situation on the ground but "unilateral steps, including settlement growth and demolitions" have continued as has settler violence and Palestinian militant activity.
Construction of illegal settlements in the occupied West Bank has reached record levels, Israeli advocacy group Peace Now said this month. Almost 13,000 new housing units were approved this year alone, it said.
Israel also continues to practise a form of collective punishment, illegal under international law, by destroying the family homes of people suspected of carrying out attacks, even after they have been killed.
The UN official also highlighted the Palestinian Authority's "dire" financial situation which has resulted in the cutting back of civil servant salaries and social assistance.
"Some $14 million continues to be held each month in line with an Israeli law mandating the withholding of what Israel says the Palestinian Authority pays to perpetrators of attacks against Israelis, or to their families," Mr Wennesland said.
The Palestinian Authority's projected deficit for this year is more than $370 million and UN-led efforts to provide assistance are only 30 per cent funded, Mr Wennesland said.