Prime Minister Binyamin Netanyahu believes that President Obama has already blinked. The way he sees it, Obama made his demand to stop settlements in Cairo. He, Netanyahu, responded with a firm "no" -- but by uttering the phrase "two states" changed the subject suficiently to get Obama off his back. He also thinks the Iran crisis has diverted Obama's focus away from the Israeli-Palestinian conflict and saved him from further pressure.

There is no other way to interpret Netanyahu's dismissal of the settlement issue in his interview with RAI TV in Italy. Settlements? "I think that the more we spend time arguing about this, the more we waste time instead of moving towards peace," he said.

He added that his conditional endorsement of a Palestinian state is all that matters. "A demilitarized Palestinian state that recognizes the Jewish State of Israel I think is the winning formula of peace," he said. "I can not understand why anybody who wants peace should reject it."

And, of course, no one does reject it, certainly not the Palestinians who accepted the two-state formula fifteen years ago and remain committed to it. It is just that unless Israel stops settlements, there will be no place for that state to go. And just yesterday the Israeli government authorized another 500 housing units in Har Homa, a West Bank settlement -- a gigantic slap in Obama's face. The US response: silence.

Former Israeli Defense Minister, Moshe Arens, from Netanyahu's Likud party told us exactly what the government is thinking in a wonderfully frank Ha'aretz column on Tuesday. "There was a time before the State of Israel was established when the Jewish people had no choice but to take orders from others...We will gladly accept advice, but not orders."

Netanyahu believes that President Obama has gone as far as he intends to go and that he need only dig in to win. Is he right? The longer we have to wait for an answer, the more likely that he is.

Israel-Palestine is the test. It is the one issue all Arabs and Muslims (and most of the world) is in substantial agreement i.e., that the occupation must end and the two state solution must be implemented.

As Obama said about Iran, the whole world is watching. If the administration flinches, it will be noticed. And our credibility in the Middle East will go back to where it was before Jan. 20. That will be despite all the progress this President has already made in repairing our tattered reputation.

President Obama cannot allow that to happen.