Jordan said on Sunday it would not extend the 25-year deal that allows Israel to use two tracts of territory along its border just as Israel said it was still planning to negotiate an extension.
Much of the land in Baquora in the northwestern part of the kingdom and Ghumar in the south is used by Israeli farmers, some of whom were given private land ownership rights and special travel rights under a 1994 peace treaty between the two countries.
The agreement will expire next year.
King Abdullah has been under increasing public pressure to end the arrangements with Israel. He told senior Jordanian politicians the kingdom wanted to exercise its "full sovereignty" over the two areas, Petra state news agency said.
"These are Jordanian lands and they will remain.." the monarch said. In an "era of regional turmoil" his kingdom -sandwiched between Syria to the north, Iraq to the east and Israel to its west – Jordan wanted to protect its "national interests," Abdullah said.
Israeli Prime Minister Benjamin Netanyahu, speaking after Abdullah's comments on Sunday, acknowledged that Jordan wanted to exercise its option to end the arrangement.
But he said Israel "will enter negotiations with it on the possibility of extending the current arrangement".
Under the terms of the peace treaty, the lease would be automatically renewed unless either of the parties notified the other a year before expiry that it wished to terminate the agreement, the Jordanian Foreign Ministry said in a statement on Sunday.
Negotiations over ending the "special regime" of the two areas would be tough with Jordan facing thorny legal issues to reclaim the land where Israeli laws now apply, officials said.
Jordan is one of only two Arab states that has a peace treaty with Israel and the two countries have a long history of close security ties.
They have also been expanding economic ties in the last year including a major deal to export billions of dollars of Israeli gas to the kingdom through a pipeline that crosses their northern borders.
But the peace treaty with Israel is unpopular and pro-Palestinian sentiment widespread in Jordan. Activists and politicians have been vocal against a renewal they say was humiliating and perpetuates Israeli "occupation" of Jordanian territory.
Political ties have also become strained over the Middle East peace process. An incident last year in which an Israeli security guard killed two Jordanian citizens within the Israeli embassy compound added to the tension.
Under an annex to the peace agreement, Israel uses about 1,000 acres (405 hectares) of agricultural land in the southern sector of its border with Jordan in the Wadi Araba desert where cash crops are exported to European and US markets.
In the Baquera area, known in Hebrew as Naharayim, Israeli citizens "ownership rights" date back to 1920's, when Russian Jewish engineer, Pinhas Rutenberg, obtained a concession in British mandated Palestine to build a power plant.
In the 1994 peace treaty, Jordanian sovereignty over the area was confirmed but Israelis retained private land ownership and special provisions that allow free Israeli travel.