As the sun rose over New York City on Thursday, June 4, Ehud Olmert, the former prime minister of Israel, lay anesthetized on a Manhattan operating table. A cancerous tumor on his prostate had recently grown in size. His doctors had "all kinds of suspicions" about it, Olmert explained when we met at his house outside Jerusalem shortly before the surgery. Olmert, 63, looked terrible. He told me he hadn't been working out lately. He had put on a paunch, his eyes had a glassy quality and he had a persistent cough. I asked whether he was feeling any symptoms. "I sometimes feel tired," he said. "But there are so many reasons for being tired." Olmert explained that he had settled on a new, robotic-assisted surgery designed to avoid damaging key nerves. An aide later said that the goal was to limit the risk that the operation would harm Olmert's ability to "function as a man."

At the very same moment that doctors were removing Olmert's prostate, Barack Obama was standing before a raucous crowd of Egyptians across the Atlantic Ocean. Obama's speech at Cairo University was wide-ranging, but officials in Israel zeroed in on the president's stern criticisms of Israeli settlements in the Palestinian territories. Obama warned that ongoing construction undermined the peace process—and, by implication, U.S. interests. "It is time for these settlements to stop," he declared. After Israeli officials protested that they had reached secret agreements with the Bush White House allowing for some "natural growth" in existing settlements, Secretary of State Hillary Clinton shot back that there was "no memorialization" of any backroom deals, infuriating her Israeli counterparts.

Following the debate from his recovery bed, Olmert must have felt betrayed. In recent years the former prime minister had tried to cast himself as a reformed hawk, a onetime expansionist who had turned against the "Greater Israel" settlement movement. One of Olmert's few political assets as prime minister was the perception that he could effectively manage the critical relationship with the United States. Now the Americans seemed to be challenging his policies, too. In two lengthy interviews for this story—Olmert's first since he left office in March—the former prime minister was defiant and sometimes combative, but also seemed exhausted and slightly desperate. "I'm not dead," he told me at one point, banging a finger on his desk. He almost seemed to be trying to convince himself. "I'm not in power, but my ideas are in power. And my ideas will prevail."

In a strange way, Olmert is right: his legacy depends in part on whether Obama can finish what Olmert and Ariel Sharon began when they evacuated settlements from Gaza and parts of the West Bank in the summer of 2005. And Obama's success or failure in forging Middle East peace will turn on whether he can avoid the snares that tripped up Olmert along the way. As the former prime minister recalled his time in office, he sometimes appeared haunted, even a little paranoid. "There were certain people who were out to get me," he told me. "I know who those people were. They exist, believe me. They know that I know. They spent millions of dollars in order to try to get rid of me. I'm happy they lost most of their money." Of course, if Olmert is right, Obama will be up against many of the same enemies.

And yet the U.S. president is right to take a harder line on settlements. For all his moderate rhetoric, Olmert's policies were deeply flawed. During the last full year of his term, construction tenders for new structures increased dramatically—by a multiple of 38 in East Jerusalem, according to one study. He failed even to remove many of the hardest-core outposts deep in the West Bank, which seven in 10 Israelis are eager to abandon. Part of his trouble was rooted in the nature of Israel's coalition system, a kaleidoscope of small parties that each hold the power to topple the government. Hobbled by corruption allegations and a failed war in Lebanon, Olmert had nowhere near the political capital to tame enemies on his right flank. At one low point during his tenure, a poll showed support for the prime minister hovering around 3 percent.

The politics of the settlements, however, are more complicated than simple coalition arithmetic. In truth, Olmert never intended to completely halt construction the way Obama is now demanding. A slim majority of Israelis—52 percent—favor a settlement freeze, according to a recent survey by Israel's Dahaf Institute. Yet, when pressed, most also favor allowing continued "natural growth" in the existing blocs encircling Jerusalem, which Israel intends to keep in any peace deal with the Palestinians. For all the bad blood between Olmert and his hawkish successor, Benjamin Netanyahu, the two are probably not as far apart as is commonly believed on this point.

Olmert thinks it's folly for Obama to publicly confront Netanyahu on the settlement issue now. It's a mistake, he insists, "to lean on him and start a concerted effort to squeeze him." One of Olmert's top aides, who asked not to be identified so he could speak more frankly, insisted that anyone who demands a total settlement freeze "doesn't know what they're talking about. They're making an issue out of something the government of Israel can't control. They won't be able to enforce it, so what's the use?" The Americans, he concluded, "will look like fools."

Israelis of nearly all political stripes tend to exaggerate the risks of freezing or removing settlements. The Olmert camp's practical objections—that private-property laws make bans on natural growth in the major blocs impossible to enforce, for instance—are also unconvincing. Experience shows that even the most fraught confrontations with the settlers can succeed. For months before the Gaza withdrawal, Israeli politicians—including Olmert—warned that the operation would fracture the Jewish state. Some worried that religious soldiers would refuse to carry out orders, or that large-scale violence would erupt in the West Bank. In the end, the evacuation went remarkably smoothly. Today a small fringe of hard-core ideological settlers still manages to make trouble, but as a mainstream movement they are largely a spent force.

For Olmert, the Gaza withdrawal was a personal turning point. He was born into a family that was once considered a pillar of the Israeli right. Olmert's father, an electrical engineer, emigrated from China to Israel in 1933. He later became the head of settlements for the Herut party, a Likud forerunner inspired by the revisionist Zionism of Zeev Jabotinsky. Herut's founding identity was wrapped up in the idea of settling what would later be called Greater Israel. When Olmert was a boy, the party's emblem was an image of the two banks of the Jordan River. "For us," Olmert told me one day several years ago, "settlements were the purest expression of the Zionist ethos. What did we do? We settled. We built settlements."

As mayor of Jerusalem in the 1990s, Olmert supported settlement building in the Arab eastern half of the city. Yet as the second intifada intensified, he also began warning that without evacuating farther-flung settlements, Israel as a Jewish state would be swept away by a tide of demography. "When you fight for the impossible," he told me in the summer of 2005, "sometimes you lose everything." Olmert's father died before he could witness the disengagement from Gaza, but Olmert once told me, somewhat melodramatically, that he believed the withdrawal would have involved a "major emotional breakdown" for his father.

The Hebrew word for "disengagement"—hitnatkut—was coined by one of Olmert and Sharon's spin doctors to soften the blow of the pullout. Yet another word used frequently to describe later withdrawals, hitkansut—"convergence" or "realignment"—is more accurate. Sharon pledged that Israel would uproot outposts deep in Gaza and the West Bank. Yet at the same time, Israel would quietly consolidate its hold on the clover-shaped ring of settlements abutting Jerusalem. An Israeli source close to Olmert told me that the strategy was a practical step to placate the settlers. "We felt we needed to give them something in order to keep them disciplined," he explained. The Americans, the source continued, were uneasily onboard.

In 2003, a team of Israelis from the prime minister's office held a series of secret meetings with their counterparts in the U.S. National Security Council in both Washington and Jerusalem, according to the Olmert aide. The talks were designed to discuss formulas for continued building within the existing blocs. The Olmert aide said the group agreed that in return there would be no new settlements built, no expropriation of additional Palestinian land, no construction beyond the "built-up line" and no economic incentives from Israel to the settlers. The exact details were kept secret to avoid antagonizing the settlers or the Palestinians. "We did it quietly, and it worked for eight years," said the Israeli source. He was incensed at Clinton's recent comments. "I wrote protocols for all the meetings," the Olmert aide told me. "I have records." A former Bush administration official involved in the talks confirmed the Israeli account.

Israeli officials have been struck by how coordinated the new line out of Washington has been. Even many ordinarily pro-Israel members of Congress read Netanyahu the riot act when he visited the United States recently. By contrast, during the Olmert years, Bush and Secretary of State Condoleezza Rice would sometimes play a kind of good cop–bad cop routine, with Rice pushing back against settlement growth and Bush trying to stay above the fray. "We had some arguments about what was perceived by them as continued building in the territories," Olmert told me of his dealings with Rice. Olmert said that Bush would ask, "Tell me, does she irritate you?"

At the end of Olmert's term he tried one last maneuver in an effort to secure a legacy. Olmert told me he met with Palestinian President Mahmoud Abbas in September 2008 and unfurled a map of Israel and the Palestinian territories. He says he offered Abbas 93.5 to 93.7 percent of the Palestinian territories, along with a land swap of 5.8 percent and a safe-passage corridor from Gaza to the West Bank that he says would make up the rest. The Holy Basin of Jerusalem would be under no sovereignty at all and administered by a consortium of Saudis, Jordanians, Israelis, Palestinians and Americans. Regarding refugees, Olmert says he rejected the right of return and instead offered, as a "humanitarian gesture," a small number of returnees, although "smaller than the Palestinians wanted—a very, very limited number."

Saeb Erekat, the chief Palestinian negotiator, confirmed that Olmert had made the offer. "It's very sad," Erekat said. "He was serious, I have to say." Erekat said that he and Abbas studied the materials and began to formulate a response, coordinating with the Americans. But time eventually ran out. A few months after Olmert presented his offer, war erupted in Gaza. Shortly after that, Olmert was out of power.

Erekat insists that Israel's continued settlement building is ultimately what "poisoned the atmosphere" at the talks. He told me that 60 percent of his conversations with his Israeli counterparts during the Annapolis process were devoted to arguments over the settlements. In the end, the Palestinian negotiator said, Olmert "was not committed to stopping settlement activity. I'm not going to say he was lying. But he was playing games with us." The complaint comes off as a little disingenuous, a conven-ient way to shift blame and avoid discussing difficult issues like Jerusalem, security and refugees. Yet that is exactly why a settlement freeze—with no exceptions for natural growth—is so important. A freeze may be a symbolic gesture, but it also removes an excuse.

Olmert and his team never seemed to master the art of diplomatic symbolism. When I met with one of the former prime minister's deputies at a café in Tel Aviv recently, I asked him to respond to Erekat's complaints. The Olmert aide lifted a hand and silently extended his middle finger.