Speaking to a full auditorium at Tel Aviv University, Emanuel said the long-discussed two-state solution has lost support and outlined what he called a "23 state solution" involving Israel, the Palestinians and 21 Arab nations.
Emanuel warned that Israel's ongoing military campaign in Gaza is straining its relationship with the United States.
"Without question, the alliance is at a crossroads. It cannot stand or survive as it has been," he said.
He condemned the October 7 Hamas attack on Israel and also criticized Israel's response, which he said has caused devastation for innocent Palestinians.
"You cannot fight indefinitely against a world that has stopped believing you have a right to fight," Emanuel said. "You must instead find a new, sustainable path to peace, to security and prosperity."
Emanuel later discussed the proposal on CNN, saying it would require commitments from all sides.
"The Palestinians rightfully get their own self, sovereignty and self-determination, gives up the idea of terrorism and violence on Jews because they are Jews, and everybody has an interest in regional stability," he said.
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In Chicago, Emanuel's remarks drew attention from Jewish and Palestinian community leaders. Jay Tcath, executive vice president of the Jewish United Fund, said he welcomed Emanuel's willingness to confront difficult issues.
"It's good that a friend of Israel with deep familial and other ties to Israel went there as a lover of Israel and told the country hard truths, including the battering that Israel is taking on the world stage," Tcath said.
Palestinian American political strategist Sabha Abour said she appreciated Emanuel's effort but questioned whether his proposal is the right one.
"If they're serious about bringing peace and stability to the region, there needs to be the right people at the table to start having those conversations," Abour said. "I think it's great that he's actually putting together a proposal, but I don't know if necessarily that is the right proposal."
Emanuel has previously said he is seriously considering a run for president, and his comments signal an early position on an issue likely to be significant for Democrats ahead of the 2028 election cycle.