South Sudan says it sent forces into Heglig after Sudan attacked its territory
Sudan and South Sudan are "locked in a logic of war", the UN Security Council (UNSC) has been told.
The two countries are fighting over their disputed border, with Sudan trying to remove South Sudan forces from its Heglig oil-field.
African Union mediator Thabo Mbeki and UN envoy Haile Menkarios gave the warning to a closed-door UNSC meeting.
US ambassador Susan Rice said diplomats discussed using sanctions to pressure both sides to de-escalate the conflict.
She added the envoys had told the Council that hardliners were in control of governments in both Khartoum and Juba.
The UNSC also repeated demands for South Sudan to withdraw from Heglig and the Abyei region, and for a "complete, immediate, unconditional" end to all fighting.
South Sudan sent its forces into Heglig last Tuesday, saying it was responding to air and ground attacks by Sudan.
On Friday Sudan launched a counterattack, with officials saying they expected "good news" within hours. But there is currently a stand-off between the two sides, with South Sudan still controlling Heglig.
No oil agreement
Heglig, which used to provide more than half of Sudan's oil, is internationally accepted to be part of Sudanese territory - although the border area is yet to be demarcated.
After the briefing South Sudan's UN envoy Agnes Oswaha said they still believed the crisis could be resolved through negotiation. "We are not going to go for the offence because we are for peace. However, we will stand on the defence and defend our territory."
Sudan's UN Ambassador, Daffa-Alla Elhag Ali Osman, told Associated Press that any sanctions should be directed at South Sudan because of its seizure of Heglig.
"We are not an aggressor. We are the victim," he said, adding that Sudan would return to talks when South Sudan "returns to its senses and accepts a withdrawal".
Ms Rice told reporters after the meeting that both sides had failed to settle several outstanding disputes in the run-up to South Sudan gaining independence in July last year.
"They have no agreement on oil, they have no agreement on their border, they have no agreement on citizenship, they have no agreement on Abyei and indeed these were issues that were meant to be resolved before independence," she said.
"Also in southern Kordofan and Blue Nile, the popular consultations in the political process which was to incorporate all the people of those regions into the larger Sudan were abandoned."
The African Union has demanded South Sudan's unconditional withdrawal from Heglig, calling its occupation "illegal and unacceptable", but also condemned Sudan for carrying out aerial bombardments of South Sudan.
Sudan has denied being behind the air raids.
Who owns Heglig oil field?
- Until 8th April, Heglig was firmly under Khartoum's control and the oil field provided more than half of Sudan's oil
- A 2009 Permanent Court of Arbitration ruling had removed it from the disputed Abyei region - its maps showed the region in the Sudanese state of South Kordofan but its jurisdiction did not extend to deciding whether Heglig lies in Sudan or the South
- Furthermore, the official demarcation of the international border is yet to be agreed following South Sudan's secession last July
- Several international bodies have condemned South Sudan for taking control of Heglig - the African Union's Peace and Security Council called it an "illegal occupation"
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