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On midday Wednesday, minutes after it was reported that Palestinian negotiator Yasser Abed Rabbo had threatened to follow Kosovo's example and unilaterally declare an independent Palestinian state if the talks with Israel stalled, chief negotiator Ahmed Qureia (Abu Ala) was on the phone to Foreign Minister Tzipi Livni. Abed Rabbo, he told her, was fantasizing, adding that an official denial was on the way. Livni did not seem concerned. What was worrying her was the possibility that her talks with Abu Ala might not lead to a Palestinian state.

In effect, the Palestine Liberation Organization (PLO) long since declared an independent state conforming to the 1967 boundaries. This November will mark the 20th anniversary of the unborn state. The declaration was issued in 1988 at a meeting of the Palestine National Council in Algiers, which also recognized a Jewish state existing alongside the Palestinian state. Now it appears that if, as Abed Rabbo warned, the negotiations will reach an impasse at the end of the year, that declaration will end up on the trash heap of history.

The talks with the Palestinians are being conducted in the shadow of growing fear in Jerusalem for the fate of the two-state solution. When Prime Minister Ehud Olmert told Haaretz at the Annapolis conference in November that if a two-state solution was not reached soon Israel would be "finished," he was not fantasizing. He and Livni know that if the "Annapolis process" goes the way of the "Camp David process," son of the "Oslo process," the Palestinian Authority will fall in their wake.

The 100,000 salaries of officials and policemen are the only fuel of the respirator that is keeping the PA alive. Jerusalem is well aware of the initiative of Adnan Abu Odeh, a Jordanian statesman of Palestinian origin who was King Hussein's court minister: for some months he has been calling openly for the PA to be dismantled and the keys to be returned to the Israeli military regime.

I heard similar comments this week from one of the most moderate of Fatah officials, a signatory to the Geneva Initiative. If the negotiations bog down at the end of the year, he said, he will demand that the territories be returned to the control of the IDF. "Instead of talking about occupation, we will recognize that we are living in an apartheid state," he said. "Instead of fighting for independence, we will fight for equal rights. We will not allow the PA to become a new version of the Village Leagues, the failed attempt by Israel in the 1980s to cultivate a local leadership in the hope of placing responsibility for day-to-day life in its hands."

Ahmad Samih Khalidi's op-ed "Thanks, but no thanks," published in the U.K.'s The Guardian on December 13, 2007, set off warning lights in Jerusalem. Khalidi, a senior associate member of St. Antony's College, Oxford, who is known as "the brain of Abu Mazen [Palestinian President Mahmoud Abbas]," predicted, or perhaps warned, that if Israel refused to withdraw from all the territories it conquered in 1967 the Palestinians "could evoke Olmert's worst nightmare [a solution based on] mutual respect, equality and mutuality, and a sense of genuine partnership in sharing the land."

Unfortunately for Olmert and Livni, the term "apartheid" makes no impression on Rabbi Ovadia Yosef, the spiritual mentor of Shas, or on the party's chairman, Deputy Prime Minister Eli Yishai. A member of the security cabinet this week likened Olmert to a tightrope walker suspended between the Palestinian partners on one side and the government coalition partners on the other. "The more he strengthens Abu Mazen, the more he hurts Eli Yishai, and the more he bolsters Eli Yishai the more he weakens Abu Mazen," the minister said.

Olmert declared this week that Abbas had agreed to defer the negotiations on the issue of Jerusalem to the end of the process. "If you put a gun to someone's forehead he will agree to almost anything but the result is liable to be the suicide of our partner," a senior Jerusalem official said. In private, Olmert says that he and Abbas have already reached understandings on everything - including Jerusalem.

Livni, the head of the Israeli negotiating team, fled from the argument over the position on the negotiating table of Jerusalem. She and Qureia agreed on three principles at the start of the talks. First, that all the core issues are on the table, bar none, but not in any predetermined the order. Second, that time will not be wasted on arguments over settler outposts and checkpoints, or terror attacks and Qassam rockets - in other words, the terrorists and the settlers will not affect the peace process. Livni and her fellow former Likudniks in Kadima adopted the formula proposed by Yitzhak Rabin: Fight terror as though there is no peace, and pursue peace as though there is no terror.

The third principle is that until a decision to the contrary is made, no details about the negotiations will be made public. Livni says progress is being made: Did anyone expect her to say it wasn't? Similarly, Qureia's remarks about progress mean little, since admitting that everything is stuck would play into the hands of Hamas. Old hands of the peace process have suggested to Livni that she be content with something modest, such as a one-page declaration of principles. Vice Premier Haim Ramon argued that this would strengthen Abbas vis-a-vis Hamas and grease the wheels of the negotiations over the detailed agreement.

Livni decided to go for broke - a total peace agreement. She wants an agreement that will deal with control of the airspace over the territories and settle the matter of control of the radio frequency spectrum in the region. Qureia agreed. He learned the hard way that general declarations, such as the Oslo Accords, lead nowhere.

The want to accomplish all this in less than a year, in two or three meetings a week. To prevent leaks, they change hotels frequently and each has only an aide or two, to take minutes and occasionally to unroll a maps. Livni brings only Foreign Ministry Director General Aaron Abramovich and an aide, Tal Becker. Concurrently, the Peace Directorate, which was reconstituted this week, is supposed to work with the Palestinians to hammer out proposals on relatively straightforward matters, such as water and the environment.

Some Foreign Ministry officials say Livni is deluding herself. Others suspect that the next act in this big show is intended to put Livni in the prime minister's office. To get there, the president must invite her to form a new government, and for that to happen the current one must first be dissolved. For that to happen, Shas must leave the coalition, and for that to take place the negotiations with the Palestinians must reach Jerusalem.

A senior intelligence figure who follows closely the developments in the Palestinian track believes that it is Olmert who is maneuvering Livni. "He has shackled her in chains of virtual negotiations," the source says. "There is no chance in the world that such a weak Palestinian leadership, which has already lost Gaza, will agree to such painful concessions." This view is popular among military personnel. He says it explains why Olmert was the first prime minister ever to forgo the authority to conduct negotiations himself with an Arab entity.

A Palestinian security official in Ramallah confirms that the popularity of the PA leadership is at a low ebb, largely thanks to Israel. Since the Hamas takeover of the Gaza Strip last June, the PA has been hunting down Hamas activists in the West Bank and foiling terrorist attacks. The head of the Shin Bet security service, Yuval Diskin, recently told the cabinet that since last June nearly 1,000 Hamas and Islamic Jihad members have been arrested in the West Bank. More than 300 members of Iz al-Din al-Qassam have turned in their weapons and signed a promise to refrain from all illegal activity. And then, after one terror attack in Dimona, the few checkpoints that were recently removed in the West Bank are replaced. The same occasion was also used in order to arrest nearly 400 people - more or less the number of prisoners that were released in Israel's last gesture to the Palestinians.

In the past few months Abbas went to European capitals more often than to Nablus and Hebron. He never misses an opportunity to announce that this is his last term of office and that in less than a year Israel will have to find a new partner. Prime Minister Salam Fayyad must globetrot and make constant budget cuts in order to get through each month. He has received international pledges of $7 billion but in the meantime is barely able to meet payroll for the PA's civil servants, more than half of whom are Fatah loyalists in Gaza who spend most of their time smoking nargilehs. To improve payment ethics, Fayyad is demanding that all applications for driver's license renewals or birth certificates be accompanied by proof of water and electricity payments.

The situation reminds Cabinet Minister Ami Ayalon of the summer of 2000, when, as head of the Shin Bet, he warned of a second intifada. Now he is talking about a third intifada. "We learned nothing from the Winograd Committee report," he says. "There is no strategy and no decision-making process. We all bear responsibility and [the security cabinet] isn't doing its job." The prime minister responded: "Ami is right. We will hold a discussion."