After refusing to accept the recommendations of the Anglo-American committee, the British were convinced by the Jewish underground that the status quo, of continued illegal immigration and military actions, was unsustainable. Consequently, the British revisited discussions with the Americans, expressing willingness to restructure the mandate to achieve some compromise. President Truman approved the plan, confirming United States participation. A special cabinet-level committee was established under the chairmanship of Dr. Henry F. Grady, who was an Assistant Secretary of State, in June 1946.

The American members of the committee were flown to London on Truman's plane, to engage in comprehensive talks with their British counterparts. On July 31, 1946, they presented their new plan that became known as the Morrison-Grady Plan. It aimed to settle most of the displaced persons (DPs) in Europe, but also would allow 100,000 to immigrate to Palestine under continued British jurisdiction, with the establishment of separate Jewish and Arab provinces, which would have limited self-rule. According to the plan, the Jews were allocated 17% of the country, while the British would maintain control of defense, foreign affairs, and immigration.

The British government accepted the plan, and attempted to initiate negotiations with both Jewish Arabs representatives. However, the Jews of Palestine refused to negotiate based on the plan, and the Arabs of Palestine would not negotiate unless the Mufti was allowed to participate. Unofficial meetings with both Weizmann and Ben Gurion did not go well. President Truman was also not a fan of the proposal.

Truman later wrote,

I studied the proposed plan with care, but I was unable to see anything that could come out of it except more unrest. The plan made the admission of 100,000 conditional and its acceptance by the Arabs, so no relief was offered in that direction either, nor was this the kind of plan that I had hoped would result. It seemed a retreat from the final recommendations made by the Anglo-American Committee of Inquiry earlier in the year. I am therefore compelled to inform Hadley that the government of the United States could not go along.

The British kept trying, however, after meeting again with Zionist leaders, they made no progress. Furthermore, the meeting with Arab leaders was characterized by President Truman as follows:

The Arabs were as uncompromising as the Jews. They made an appearance at the round table talks, which the British convened late in January 1947, but they would not yield an inch, for their position was that Palestine was an Arab country and should be kept Arab.

The talks collapsed on February 14, 1947, at which point, the British gave up trying to reach an agreement and turned the matter over to the UN.