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When Palestinian Prime Minister Salam Fayyad announced his two-year plan for building the institutions of a Palestinian state, in August, it was received warmly and favorably in international forums. They viewed it as the first serious institution-building blueprint, one that could pave the way to a declaration of the political independence of a Palestinian state. It was assumed at the time that, while creation of the institutions proceeded, the negotiation process would be put to the test under the new American administration. And that in light of this test, it would be possible to proclaim the state with unanimous approval both at home and abroad, if the political process followed a positive course or, should Israeli intransigence undermine it, with at least the backing of the international community.

President Barack Obama was overly hasty in adopting a firm stand on the issue of Israeli settlement activity: His call for a construction freeze and his denial of the legitimacy of the settlements raised false hopes among the Palestinians. False, because soon enough, the administration retreated under Israeli pressure, and instead appealed to the Palestinians to give up their demand for a complete freeze on settlement activity. Their subsequent disappointment led to their own hasty declaration of the intention to go to the UN Security Council to seek international recognition of a Palestinian state, without waiting for the two-year period proposed by Fayyad so as to allow the right conditions to arise. That announcement has elicited negative reactions, particularly from the American administration.

President Obama now understands that in next year's midterm congressional elections, his party could lose its two-house majority, if he incurs the enmity of mainstream Jewish groups and the Christian right. The president also has to contend with the subject of health-care reform, for which he is still seeking approval; an economic crisis, from which his country has yet to recover; the escalating war in Afghanistan; Iraq, from which he still cannot extricate himself; and several other challenges. Obama faces a situation that requires domestic support and calm if he is to be able to achieve even partial success. None of the above will be possible if he finds himself on a collision course with Zionist and Jewish groups and the Christian right. Indeed, the statements of his secretary of state on Jewish settlements and her praise for Benjamin Netanyahu's government were considered an insult to the Arabs, an abandonment of the Palestinians and surrender to the Israeli position.

The settlements issue dates back to the Oslo talks, where those negotiating on behalf of the Palestinians - including Mahmoud Abbas, today the president but then the mastermind behind the scenes - failed to wrest an agreement from the Israelis for a building freeze in the West Bank and East Jerusalem. In retrospect, Abbas' flexibility was not helpful. Ongoing settlement activities meant that the status quo was not preserved, "facts" were created on the ground, and the outcome of the negotiations was determined even before they began. Now he feels he shares responsibility for this failure.

After then-president George W. Bush launched the Annapolis process, two years ago, negotiations between Abbas and prime minister Ehud Olmert commenced, in parallel with talks between Ahmed Qureia and Israeli foreign minister Tzipi Livni - and neither of the Palestinians stipulated that negotiations would halt if settlement construction proceeded, even though that was one of Israel's principal obligations according to the road map proposed by the Quartet in 2003. And so settlement construction continued to gnaw away at East Jerusalem and the West Bank.

Today, the Palestinian leadership is reaping the fruits of its past chronic mistakes. From a tactical perspective, the fact that it has entrenched itself behind the demand for a settlement freeze only put Benjamin Netanyahu in a more comfortable situation, relieving him of having to do anything serious to facilitate the resumption of the peace process.

The recent announcement by the Netanyahu government regarding a "limited freeze" on construction in the settlements is meaningless, so long as it excludes Jerusalem, public buildings, and some other 3,000 housing units alleged to be already under construction in the West Bank.

Ironically, the lack of seriousness demonstrated by the Netanyahu government makes it more difficult for Abbas to retreat from his own position. He feels he has been betrayed, misled and used as a cover by Israel for continuing its own settlement policy. At the same time, the dream of the Palestinian state is fading quickly, this time perhaps forever, leaving the scene open to further bloodshed and violence. Netanyahu's cunning, maneuvering and throwing sand in the eyes are not helpful. Nor are settler protests and other demonstrative acts.

Although there is little basis for optimism, the Netanyahu government will need to undertake serious, substantial if there is any chance of resuming negotiations between Israel and the Palestinians with a clear agenda, framework and timetable meant to lead to an end to the 1967 occupation.

Ziad AbuZayyad is editor of the Palestine-Israel Journal, and a former minister and PLC member in the Palestinian Authority.