PRESIDENT OBAMA'S Middle East peace diplomacy has made some progress, but an early error still haunts it. The president's ill-advised attempt to force a freeze of Israeli housing construction in Jerusalem and the West Bank could cause the breakdown this weekend of direct talks on a final settlement, only a month after they began.

Palestinian President Mahmoud Abbas has threatened to walk out of the negotiations if Israeli Prime Minister Binyamin Netanyahu does not extend a nine-month moratorium on construction in Jewish settlements. Mr. Netanyahu contends that his Cabinet will not support an extension.

A diplomatic rift over this issue would be senseless, for the same reasons that Mr. Obama was unwise to emphasize it in the first place. Most Israeli construction now takes place in areas close to Israel that both sides acknowledge it will annex in any final deal. As Palestinian Prime Minister Salaam Fayyad remarked Wednesday, any building that begins in the next year -- the time frame set for the negotiations -- will be immaterial to their outcome.

Mr. Fayyad's comment at a dinner sponsored by the American Task Force on Palestine was one of several welcome indications that both sides are looking for a way out of the impasse. The prime minister suggested that a several-months extension of the moratorium could be linked to a deadline for agreement on the borders of a Palestinian state -- which would end the debate over settlements. Members of Mr. Netanyahu's government have floated the idea of a limit on housing construction to those areas Israel will probably annex. Stuck in the middle, the Obama administration is simultaneously pressing Mr. Netanyahu for an extension and urging Mr. Abbas not to end the talks even if it does not happen.

Mr. Netanyahu risks looking like a spoiler if he fails to offer Mr. Abbas at least a partial concession -- perhaps a private assurance that no building permits will be given to settlements in East Jerusalem or beyond Israel's West Bank fence. But in the end the Palestinian president would be foolish to end the talks. In so doing, he would leave Israel free to proceed with unchecked settlement construction while postponing Palestinian statehood indefinitely. He would also place himself at greater domestic political risk, since the end of negotiations would empower Palestinian militants.
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If he stays in the talks, Mr. Abbas can oblige Mr. Netanyahu to spell out his specific terms for Palestinian statehood, something he has yet to do. If they resemble those offered by previous Israeli governments, it might be possible to move relatively quickly toward an accord on borders and security. If the Israeli offer is unreasonable, the pressure will shift to Mr. Netanyahu.

Mr. Obama and Mr. Abbas all along have sought to put the Israeli leader on the spot. But they must do so on the right issue -- not settlements, but the terms for Palestinian statehood.