The upheaval in Iran offers the Obama administration a host of fresh foreign policy opportunities. Not the least of them is a chance to creep away from the corner into which it has painted itself in the Arab-Israeli peace process.

President Obama began with a broad strategy of simultaneously pressing Israel, the Palestinians and Arab states to take concrete steps toward peace. By the time Iranians took to the streets, it had allowed that broad front to be narrowed to a single point: a standoff with the Israeli government of Binyamin Netanyahu over whether "natural growth" would be allowed in Jewish settlements outside Israel's 1967 borders.

Pressuring Israel made sense, at first. The administration correctly understood that Netanyahu, a right-winger who took office with the clear intention of indefinitely postponing any Israeli-Palestinian settlement, needed to feel some public heat from Washington to change his position -- and that the show of muscle would add credibility to the administration's demands that Arab leaders offer their own gestures. But, starting with a statement by Secretary of State Hillary Rodham Clinton in May, the administration made the mistake of insisting that an Israeli settlement "freeze" -- a term the past three administrations agreed to define loosely -- must mean a total stop to all construction in the West Bank and even East Jerusalem.

This absolutist position is a loser for three reasons. First, it has allowed Palestinian and Arab leaders to withhold the steps they were asked for; they claim to be waiting for the settlement "freeze" even as they quietly savor a rare public battle between Israel and the United States. Second, the administration's objective -- whatever its merits -- is unobtainable. No Israeli government has ever agreed to an unconditional freeze, and no coalition could be assembled from the current parliament to impose one.

Finally, the extraction of a freeze from Netanyahu is, as a practical matter, unnecessary. While further settlement expansion needs to be curbed, both the Palestinian Authority and Arab governments have gone along with previous U.S.-Israeli deals by which construction was to be limited to inside the periphery of settlements near Israel -- since everyone knows those areas will be annexed to Israel in a final settlement. Before the 2007 Annapolis peace conference organized by the Bush administration, Saudi Arabia and other Arab participants agreed to what one former senior official called "the Google Earth test"; if the settlements did not visibly expand, that was good enough.

Netanyahu, whose poor relations with Washington contributed to his ouster from office during a previous stint as prime minister, has been relatively quick to come around. In recent weeks he has delivered a speech in which he agreed for the first time to Palestinian statehood. In the West Bank Israel is removing military roadblocks, turning four more towns over to Palestinian security forces and taking the first steps to remove settlements it deems illegal. Meanwhile, government envoys -- led by Defense Minister Ehud Barak, who will be in Washington today -- have been offering various compromise formulas.

Curiously, though, the administration -- led by the State Department -- keeps raising the stakes. Clinton went out of her way on June 17 to disavow any agreements between the second Bush administration and Israel over "natural growth" in some settlements. In a press briefing last Monday, State Department spokesman Ian Kelly responded to a question by saying the administration opposed new construction in all areas "across the [green] line" in Jerusalem -- a definition that would prohibit Israeli building in such areas as the Jewish Quarter of the Old City.

The result of such posturing is that the administration now faces a choice between a protracted confrontation with Israel -- an odd adventure given the pressing challenges from Iran and in Iraq, not to mention the disarray of the Palestinian camp -- or a compromise, which might make Obama look weak and provide Arab states further cause to refuse cooperation. The White House, I'm told, still hopes Netanyahu will accept a construction moratorium, with a time limit and perhaps a waiver for some buildings under construction. But at this point some damage is probably unavoidable: If Barak and Middle East envoy George J. Mitchell agree on any formula short of that spelled out by Clinton and her spokesman, Arab media will trumpet it as an Obama cave-in.

The best course nevertheless lies in striking a quick deal with the left-leaning Barak this week under cover of the tumult in Tehran. The administration could then return to doing what it intended to do all along: press Palestinians as well as Israelis, friendly Arab governments and not-so-friendly Iranian clients such as Syria to take tangible steps toward a regional settlement. Such movement would be the perfect complement to the cause of change in Iran; how foolish it would be to squander it over a handful of Israeli apartment houses.