Nine Turkish activists were killed in an Israeli commando raid in May 2010 on the ship, which was part of an attempt to break the blockade of Gaza.
Speaking to reporters this week, Arinc, head of the Turkish team negotiating with an Israeli delegation, said the stall stems from Israel's insistence the compensation not be labeled restitution for a wrongful act, Hurriyet Daily News reported Thursday.
"In our first meeting [the Israelis] showed no opposition to this. But in the second meeting, they intended to give an ex gratia payment as a form of reparation because they fear compensation [as a result of their wrongful act] will set an example for other cases, which is not a concern to us," the newspaper quoted Arinc as saying.
He added that two other conditions Israel had earlier approved included lifting the blockade and acknowledging the loss of life on the Mavi Marmara, the Turkish daily said.
Israeli and Turkish delegates met three times in April and May.
The Israeli raid on the boat led to a total collapse in diplomatic ties between the two countries.
Israel said many of the activists aboard the ship were armed and the commandos were forced to defend themselves. Turkey's demands Israel apologize were ignored until March. At U.S. President Barack Obama's request, Prime Minister Binyamin Netanyahu apologized to his Turkish counterpart in a telephone conversation, paving the way for meetings between the sides to discuss compensation and improve ties.