The latest Israeli-U.S. clash over construction in east Jerusalem indicates again how difficult it's going to be to shape the regional reality Barack Obama desperately wants. That's why there's a new deluge of policy proposals - not least of which is Israeli President Shimon Peres's trial balloon: a Palestinian state with provisional borders, leading to a permanent Israeli-Palestinian deal. Both parties officially reject the idea. But if properly formulated, it just might be a way of satisfying key Israeli and Palestinian needs.

Although Israel's presidents play a largely ceremonial role, it's important to listen when Mr. Peres speaks. The vast experience in Middle East peacemaking and the international respect he commands have already made him Benjamin Netanyahu's troubleshooter with foreign governments.

A Palestinian state with provisional borders isn't a new concept. It appeared as Phase 2 of George Bush's 2002 road map. Israel and the Palestinian Authority accepted the road map (each with significant modifications) but had serious reservations about the provisional phase. Palestinians feared that, without agreement on final borders, temporary territorial arrangements that fell short of their demands would become permanent. Israel feared that, once it gave up land and Palestinians were granted a state, there'd be no incentive for Palestinian concessions on other issues. Both were right to be concerned.

Although the road-map framework still matters, there's been considerable water under the bridge since Mr. Bush first floated his idea. The U.S. decided to bypass Phase 2 and pursue a comprehensive agreement before the 2008 election. But direct Israeli-Palestinian negotiations to that end quickly resurfaced the divide on sovereignty over Jerusalem's holy sites and the Palestinian demand for the right of return for 1948 refugees to Israel. Hamas's hold on Gaza and Palestinian politics further handicapped the possibility of agreement. And now, his own statements about a consensus on two states notwithstanding, several of Mr. Netanyahu's coalition partners oppose territorial concessions.

The stalemate has led outgoing European Union foreign-policy chief Javier Solana to propose a UN deadline for recognition of a Palestinian state if the sides can't agree. In effect, this would be an imposed solution and would not serve Israel's interest.

Realistically, though, if Israel and the Palestinians hold on to their demands regarding a permanent agreement, the status quo isn't likely to change and ideas such as Mr. Solana's may yet have traction. In turn, if made more robust and less provisional, the “temporary agreement” might have merit. To make it work would take agreement on virtually permanent borders - but in a provisional framework that left other issues unresolved.

A package that kept most settlement blocks inside Israel, evacuated other settlements and included land swaps to satisfy Palestinian demands could put the issue to rest. A security package that included demilitarization of the Palestinian provisional state and an international monitoring force could satisfy another key Israeli need. Both elements have been discussed, but to make this happen now will require enormous political will.

As for Jerusalem and refugees, a provisional agreement that provides security but averts the need for permanent resolution might leave a way out for all. The disputed “holy basin” could be managed under international auspices (not unlike former Canadian diplomat Michael Bell's Old City Initiative), thereby averting Israel's concern about Palestinian sovereignty over the city's sacred sites. The Palestinian demand for return of refugees to Israel would admittedly remain open-ended, but defined borders would give Israel's Jewish nature practical and international legitimacy.

There's potentially a big carrot here for both sides. While Israel would give up land, an agreement on borders, even without concessions on refugees and Jerusalem, could kick-start the normalization process that's part of the Arab League peace initiative. Palestinians, in turn, could gain a state and territory without having to formally concede on other core demands. Moreover, a provisional deal may be the formula that facilitates internal Palestinian agreement.

The status quo is damaging and the desirable comprehensive agreement may be unreachable. Psychological barriers remain huge. Middle East envoy George Mitchell says it took him 700 days to come up with an agreement on Northern Ireland. That's pretty much the two-year framework that Mr. Obama has given his Middle East team.