At a dinner hosted by American Jewish leaders for the Palestinian President Mahmoud Abbas, I was seated with a senior U.S. diplomat to my left, the secretary general of the Palestine Liberation Organization to my right, and Abbas opposite.

It was like listening to a rousing peace overture as an ominous leitmotif of disaster keeps returning with ever greater insistence.

While Abbas referred to Israeli Prime Minister Benjamin Netanyahu as his “partner in peace” and said it would be “criminal” if Palestinian and Jewish leaders failed, the American diplomat and Yasir Abed Rabbo of the P.L.O. kept whispering in my ear that the mother of all train wrecks was looming. “Netanyahu is playing games,” Rabbo said.

I came away from the dinner convinced the United States is on the brink of a diplomatic fiasco. Less than a month after President Obama put the imprimatur of a White House ceremony on renewed Israeli-Palestinian talks, the negotiations are close to breakdown. If that happens, as Netanyahu and Abbas know, Obama would look amateurish.

The two leaders need the United States, an incentive to avoid humiliating Obama. But with just a couple of days to the expiration Sunday of an Israeli freeze on settlement construction in the West Bank, both sides are digging in. Despite Obama’s public plea to Netanyahu — “It makes sense to extend that moratorium” — the Israeli government seems to have rejected a formal extension.

That would be a terrible mistake. Obama should fight it until the last minute. His international credibility is on the line.

Abbas made nice at the dinner, inching back from earlier statements that he would abandon the talks if settlement construction resumes. He could not say he would walk out but it would be “very difficult for me to resume talks.” Bottom line: Renewed building would be a body blow to the latest peace effort.

Why, Abbas asked, could Netanyahu not tell his center-right cabinet he needed a three-month extension because direct talks were at a delicate stage? Good question, in response to which Netanyahu could ask another: Why did the Palestinians wait until the moratorium was about to expire to resume talks? Dan Meridor, Israel’s minister of intelligence and atomic energy, got philosophical: “The end of the freeze is a test case for the concept of compromise. Neither side will get all it wants.”

Fair enough in principle, but Meridor misses the point. This decision is a symbolic test case of something much deeper. It is a test case of Israeli seriousness about peace. It is a test case of whether the two-state idea really outweighs the lingering Messianic one-state Judea and Samaria illusion.

If there is to be a two-state solution, it cannot be that the physical space for a Palestinian state keeps diminishing, square meter by square meter, as settlements expand. Two plus two cannot equal five.

The 43-year history of the Israeli occupation of the West Bank has been painful and corrosive, a cycle of harsh repression and Palestinian terror. In “The Yellow Wind,” the Israeli novelist David Grossman, whose New Yorker profile by George Packer is a must read, put it this way: “I could not understand how an entire nation like mine, an enlightened nation by all accounts, is able to train itself to live as a conqueror without making its own life wretched.”

Do Israelis, in their majority, want to continue to lord over another people? Or are they ready, with the right security guarantees, to make the painful choices that would, in restoring dignity to a neighboring people, also confer riveting new dignity on Israel?

I believe they are ready to take that risk — peace is also risk — but Netanyahu has to lead them there. He has not yet made the decision to do so. He’s a politician with his finger to the wind. What he senses from within his own Likud party and others further right is that he cannot extend the freeze and hold things together.

Or so it seems. Oh, sure, he’ll commit privately to limiting West Bank construction to a bare minimum. But that won’t cut it with a Palestinian leadership that has taken courageous steps to stabilize the West Bank and needs a clear signal — now — that Israel understands peace will involve reversing the settlements, not growing them further.

Abbas is serious about peace. His prime minister, Salam Fayyad, is very serious and has done enough on the West Bank to prompt a World Bank statement this week saying: “If the Palestinian Authority maintains its current performance in institution-building and delivery of public services, it is well-positioned for the establishment of a state at any point in the near future.” Both men have done an enormous amount to curb violence, renounce it as a method, and establish credible security services. Israel will not find better interlocutors.

But the progress is fragile, as recent clashes have shown. That’s why Obama must now break some bones to get his way: “Bibi, read my lips. It makes sense to extend that moratorium by a few months. For Israel and for the United States.”