Benjamin Netanyahu’s government on Jerusalem is ill conceived. This was amply demonstrated by the announcement of the construction of 1,600 new apartments in the occupied eastern segment of the city during what was supposed to be a charm visit by US Vice President Joe Biden, Israel’s best friend in President Barack Obama’s administration.

And yet, while Netanyahu might not be a great peacemaker, the Obama administration, by portraying the announcement as a deliberate attempt to frustrate the upcoming indirect talks with the Palestinians, exaggerated the incident for its own purposes.

However unconvincing Netanyahu might sound to his critics, he is interested in negotiations. That does not mean that he is capable of taking the necessary decisions on the core issues, without which it will be impossible to conclude an agreement. But, in addition to peacemaking, Netanyahu is also – and perhaps primarily – engaged in a survival exercise, an impossible attempt to please too many actors with disparate expectations.

Negotiations with the Palestinians are a way to please Obama, whose backing Netanyahu will badly need if and when a green light for an assault on Iran’s nuclear installations is required. That is why the prime minister authorized what US Secretary of State Hillary Clinton called an “unprecedented” freeze on expanding West Bank (as opposed to Jerusalem) settlements.

Netanyahu also has promoted his idea of an “economic peace,” with the hope that an agreement on the core issues of the conflict would be deferred. In pursuing this policy, Netanyahu has done considerably more than many of his predecessors to improve living conditions in the West Bank. And, while doing this, he has had to make certain that his peace gestures are not too generous for his right-wing coalition to digest.

If successful in squaring these circles, Netanyahu might be entitled to a Nobel Prize – not for peace, but in physics. By building new neighborhoods in East Jerusalem, Netanyahu caters to his coalition’s expectations, but puts at risk a central achievement of Ehud Barak’s government a decade ago – the agreement with President Bill Clinton that recognized East Jerusalem’s then existing Jewish neighborhoods as part of Israel’s capital.

If neutralizing Iran is an Israeli objective, then Netanyahu’s Jerusalem policy is a strategic folly, for it offers Iranian President Mahmoud Ahmadinejad an ideal platform to rally the Muslim world against Israel and its American allies.

It also poses a serious problem to the Arab moderate camp, which defended pursuing negotiations with Israel at the recent Arab summit in Libya. Jerusalem, a convenient rallying cry for Muslims throughout the world, is a powder keg with too many candidates ready to light a match.

Obama’s administration would like to see an end to Iran’s nuclear project, but it does not share Israel’s determination to pursue crippling sanctions against Tehran, let alone the Israeli desire to seriously consider a military option against Iranian nuclear facilities. The diluted sanctions now being considered by the Americans, and their persistent advice to the Israelis to refrain from attacking Iran, reflect a yawning disparity in the two allies’ approaches.

To Netanyahu, stopping the Iranian bomb is an existential priority. Obama’s priorities lie in Baghdad, Kabul, and America’s reconciliation with the Muslim world. His administration is clearly signaling that it can live with a nuclear Iran.

Obama’s main objectives in pursuing an Israeli-Palestinian peace are ensuring American soldiers’ safety on the battlefields of the wider Middle East and improving America’s standing in the Arab world. This was made clear by the recent testimony of General David Petraeus, the head of America’s Central Command, responsible for military affairs in the Middle East.

Petraeus defined the question of Palestine as the root cause of instability in the region, saying that a perception of US favoritism for Israel foments anti-American sentiments.

Netanyahu would do well to assume that an Israeli-Palestinian peace is related to the Iran question, not because it would help create the conditions for a military assault, but because it would help to dissolve the Iran-led regional coalition, which includes Syria, Hamas and Hizbullah. In fact, Iran’s defiance of the international community over its nuclear program plays a crucial role in holding this coalition together and maintaining Iranian leadership of the anti-American camp in the region. Defeat of Iran’s nuclear ambitions would humble the Islamic Republic and undermine its regional alliances.

Netanyahu’s Jerusalem policy is dangerous, but so is the Palestinian Authority’s game over their sacred mosques – Al-Aqsa and the Dome of the Rock – on the Temple Mount. Although the Palestinians would be right to oppose Israel’s policy of limiting their living space in the city, at no moment since the 1967 occupation of East Jerusalem has an Israeli government questioned the Palestinians’ authority over these shrines. The recent call by Palestinian leaders like Mohammad Dahlan for Arab Israelis and East Jerusalem residents “to protect the Haram [holy site] from the Jews” might end in unintended violence.

The Palestinian Authority’s game in the holy city, like Benjamin Netanyahu’s unyielding challenge to the status quo there, both convey an unequivocal message: Jerusalem is too central to the prospects of an Arab-Israeli reconciliation and to the task of attenuating the dangerous mass hysteria throughout the region to be left as an open wound.