President Barack Obama, who vowed to revive the Arab-Israeli peace process at the start of his term, has begun with a direct and public challenge to Israel’s latest plan to build new settlements in East Jerusalem.

It’s a risky move, which has already provoked a sharp rebuke from Israeli Prime Minister Benjamin Netanyahu. But it is crucial, and had to be done.

Obama picked a small but symbolic issue: a 20-unit housing project on the site of the former Shepherd Hotel, sparking a full-blown diplomatic standoff. Just days after the U.S. objected to the project, the European Union, Russia and France did the same.

This gambit puts the settlements issue at the center of the table, even before the next round of Arab-Israeli negotiations start -- if they ever do. The downside is that it might only serve to harden Israel’s stance, without softening Arab positions.

The stalemate in the Middle East needs a new approach, and Obama is right to give it a try. By opening the most sensitive dossier first, he has delivered to Israel its first dose of tough love since the administration of President George H.W. Bush.

Provocative Timing

There can be no so-called two-state solution that doesn’t take into account the famous “facts on the grounds,” created by Israel over international objections. At issue are the fate of some 300,000 Israeli settlers now living in the West Bank, and another 190,000 in East Jerusalem.

Neither the U.S. nor the rest of the world has ever recognized Israel’s claim to the territories -- including mostly Arab East Jerusalem -- it captured after its victory in the 1967 Middle East war. By international standards, that makes housing projects for Jewish residents in those areas “settlements.”

The Shepherd Hotel site is a case in point. The most important fact about this particular project is that the building permit was granted on July 2, just weeks after the Obama administration first signaled its zero-tolerance for new building in the captured territories.

Israel’s timing couldn’t be more provocative. Giving the green light to the project now, after years of delays, may be part of a larger plan to “Balkanize” East Jerusalem, splitting neighborhoods in such a way that a future political solution for the city becomes impossible.

Or it may have been intended as a signal that Israel will continue to build as Israel sees fit, no matter what Washington says.

No ‘Natural Growth’

Either way, it is “unhelpful” as Condoleezza Rice, the former secretary of State, said in 2005 about other unilateral steps taken by Israel in East Jerusalem. That was her polite, and not very effective, way of telling Israel to hold off.

The Obama administration’s call for a freeze on new settlement construction has been unambiguous. The U.S. “wants to see a stop to settlements -- not some settlements, not outposts, not ‘natural growth’ exceptions,” said Secretary of State Hillary Clinton on May 27. She could have added “not in East Jerusalem,” which was the point of a message about the Shepherd Hotel project delivered this month to the new Israeli ambassador to the U.S.

Israel’s reaction was just as clear: an undivided Jerusalem is and will always be the capital of Israel. “Our sovereignty over it cannot be challenged,” said Netanyahu at a July 19 cabinet meeting. No one, he added, has the right to tell Jews where they can live in their own capital city.

Changing the Subject

Obama, as a candidate, promised to support Jerusalem’s status as the undivided capital of Israel. What the boundaries of the city will end up being depends on negotiations.

The Israeli government has tried to change the issue: Dan Meridor, an Israeli government minister, accused the Obama administration of breaking with an agreement made in 2004 with President George W. Bush.

His protest is disingenuous. The Israelis themselves have “not fully” lived up to that agreement, in the words of Elliot Abrams, a National Security Council adviser in the second Bush administration. One of the four brokered points called for a halt to government subsidies for settlers. Those have in fact continued.

Challenging the Israelis is a requirement for any U.S. administration interested in serious peace-making in the Middle East, said Aaron David Miller, a scholar at the Woodrow Wilson International Center for Scholars, who was an adviser on the region to several U.S. secretaries of State.

This time, both Netanyahu and Obama have “climbed up a very big tree,” Miller said. “They can stay there and scream, they can climb down, or they can make a deal.”

Obama is right to signal that there can be no deal as long as Israel tries to get away with creating more facts on the ground. Breaking the stalemate requires inflicting some pain, even if it’s on the U.S.’s best ally in the Middle East.