The Israeli offer received a cool reception in Ramallah, according to Palestinian officials who spoke on condition of anonymity because they were not authorized to discuss the issue with reporters.
The officials said the release of the long-held prisoners was not up for new negotiations, and that any discussions about extending negotiations can only begin once those prisoners are freed.
The Palestinians demanded a full settlement freeze and the release of 1,000 additional prisoners, including political leaders, as a condition for extending negotiations.
The officials said Israel's offer to show "restraint" in settlement expansion on occupied lands was largely meaningless since it would halt only the issuing of tenders for new construction.
The Israeli anti-settlement group Peace Now said Tuesday that promise would not affect construction of thousands of settlement apartments that have already been approved.
The inclusion of Pollard, a former U.S. naval intelligence analyst convicted of spying for Israel nearly three decades ago, had been the most surprising element of recent efforts to rescue the faltering peace talks. It reflected the importance Kerry put on continuing the talks.
Earlier Tuesday, an Israeli government official said that as part of that deal, Pollard was to be released before the Passover holiday, which begins April 14.
For years, U.S. officials have vehemently opposed any talk of releasing Pollard early.
He is serving a life sentence at a federal prison in North Carolina but eligible for parole in November 2015. He was arrested in 1985 and convicted of espionage for giving reams of classified documents to his Israeli handlers.
Pollard's case has become a rallying cry in Israel, where leaders say his lengthy sentence amounts to excessive punishment when compared with other U.S. espionage cases.
Prime Minister Benjamin Netanyahu, who once visited Pollard in prison when he was out of politics, and other Israeli leaders have routinely pressed President Barack Obama and other U.S. presidents for his pardon or release.