ISRAELI PRIME Minister Binyamin Netanyahu took office in March after a campaign in which he refused to support Palestinian statehood, promised an expansion of Jewish settlement in the West Bank and hinted at a new military campaign to "topple" Hamas in the Gaza Strip. Eight months later, the Israeli leader is on record as accepting a Palestinian state, is deep in negotiations with Hamas over a possible prisoner swap, and -- most remarkably of all -- has dispatched inspectors and security forces to the West Bank to enforce a 10-month suspension in Jewish housing construction.

You'd think all this would prompt at least light applause for Mr. Netanyahu -- who through most of his political career has been known as an intransigent nationalist -- and for the Obama administration, which has invested considerable effort and diplomatic capital in obtaining Israeli concessions. Instead both are being trashed in Arab and European capitals: Mr. Netanyahu for not accepting an absolute freeze on all construction outside Israel's 1967 borders, and the White House for not forcing him to do so. Palestinian President Mahmoud Abbas still declines to meet Mr. Netanyahu, and he is instead is threatening to resign. This is odd, because the settlement restrictions, while not exactly "unprecedented," as Secretary of State Hillary Rodham Clinton claimed, go beyond those observed by several of the Israeli governments with which Mr. Abbas has negotiated.

Part of the problem is lingering suspicion of Mr. Netanyahu, who still appears unlikely to agree to reasonable terms for a Palestinian state. Part is the lingering effects of early missteps by the Obama administration, which demanded too much, too publicly from Israel. But the continuing impasse also reveals the underlying reluctance of either Mr. Abbas or Arab leaders to invest in a new peace process. That doesn't mean the Obama administration should give up on trying to start talks, since Middle East history shows that even unproductive negotiations are better than none. But it is a reason for the administration to escalate its support for the nation-building project being conducted by Mr. Abbas's nominal deputy, Prime Minister Salam Fayyad.

Breaking with a long history of Palestinian passivity, Mr. Fayyad has vowed to build the institutions of statehood from the ground up over the next two years, with or without a peace process. He has made headway in creating more professional security forces and in stimulating the economy. Thanks in part to Mr. Netanyahu's willingness to remove roadblocks and other barriers to movement, double-digit economic growth is expected in the West Bank next year. If such progress continues, the momentum for creating a new state, at least in the West Bank, could be powerful within two years. So the Obama administration should continue cajoling Mr. Abbas -- but design its strategy around Mr. Fayyad.