Barack Obama has barely a week to save the Middle East peace process from collapse, only months after he relaunched it amid optimistic predictions that a solution would be reached within a year. The consequences of failure will be serious for the US president; for the region and the wider world, they are potentially disastrous.

Israel's refusal to extend a moratorium on settlement building in the West Bank is the ostensible reason for the halt in direct talks with the Palestinians. Speaking at the weekend after the PLO refused to continue the negotiations, executive committee member Hanan Ashrawi said a line had to be drawn.

"How can you have a two-state solution if you are eating up the land of the other state?" Ashrawi told the Washington Post. "The Israelis have to understand once and for all that they just can't continue with this approach … We can't afford it any more."

Binyamin Netanyahu, Israel's prime minister, is likewise refusing to budge. He reportedly told US officials that a 60-day extension to the building moratorium that expired last month, as sought by Obama, would damage his political credibility and endanger his coalition.

He also argued that the Palestinians were being unreasonable, given past practice. "For 17 years the Palestinians conducted direct talks with Israeli governments while building went on in Judea and Samaria (the West Bank)," Netanyahu said, ignoring Ashrawi's point that this was no longer tolerable. Limited new settlement activity during the next 12 months would not affect the final two-state map, he argued.

As matters now stand, the impasse will be discussed at the Arab League summit in Libya at the weekend, where Mahmoud Abbas, the Palestinian president, says he will seek the "advice" of fellow leaders. If, as currently expected, they endorse the PLO position, direct talks may be suspended indefinitely at the beginning of next week.

George Mitchell, Obama's peace envoy, is lobbying friendly Arab governments but has made no headway so far. Egypt, increasingly distracted by a looming succession crisis, is as usual punching below its weight. The dire warnings issued by Jordan's King Abdullah about new regional conflict seem to have fallen on deaf ears. Washington's friends in the Gulf, more wary of Iran than of Israel, are meanwhile arming themselves to the teeth, aided by $120bn in US weapons sales.

Mitchell's effectiveness has been undermined by complaints that he exaggerated the progress made in the first three rounds of direct talks. He indicated that rapid advances were being made, but Arab and western diplomats told Haaretz newspaper that nothing of substance had been discussed.

"Netanyahu refused to hold a serious discussion on any of the core issues apart from security, Abbas reportedly told diplomats at the UN general assembly," Haaretz said. "Israeli and foreign sources say the main problem is that Netanyahu refuses to present fundamental positions or discuss the borders of the Palestinian state."

In other words, resumed Jewish settlement building was not the only or even the main stumbling block. Abbas was reportedly dismayed, for example, by Netanyahu's insistence that an agreement, if any were reached, must be implemented over a period of 20 years.

Netanyahu may be calculating that big Republican gains in next month's US midterm congressional elections will curtail Obama's capacity to put pressure on Israel. If the process does collapse, Netanyahu will be able to say, publicly, that it was the Palestinians, not he, who turned their backs on peace; and privately, that the inexperienced Obama screwed up, a verdict that the American right will gleefully endorse.

Across the region, anti-Israel forces are gearing up for failure, as is their wont. Visiting Tehran at the weekend, President Bashar al-Assad of Syria definitively dismissed recent US conciliatory moves and stressed Syria's "eternal" brotherhood with Iran. "The [Israel-Palestinian] negotiations follow no goal but are merely intended to improve the Obama administration's image domestically," Assad said.

Further stirring the pot with characteristic insouciance, Mahmoud Ahmadinejad, Iran's president, is due to visit Lebanon this week, where his political and military allies in Hezbollah are thought to be preparing new attacks on Israeli targets. Arab press reports say Ahmadinejad will visit the Lebanon-Israel border and make a symbolic gesture by throwing stones at Israeli soldiers – a possible reprise of the famous act of defiance by the late Palestinian intellectual, Edward Said, in 2000.

Israeli officials are already describing Ahmadinejad's visit as a provocation, and are pressing the Lebanese authorities to rein him in. A row would doubtless delight Hamas, the rejectionist "other half" of the Palestinian nation, that has consistently reviled the latest peace efforts from its isolated Gaza ramparts.

The collapse of the talks process, so laboriously constructed, would almost certainly spell a humiliating end to Obama's peace drive, although indirect diplomacy may stutter on. It would entrench Netanyahu and the Israel right, whose priority is confrontation with Iran, not compromise with the Palestinians. And it would serve to further convince the Palestinians themselves, and the wider Arab world, that a two-state solution is not attainable.

In the absence of a better idea, and notwithstanding the multiple tragedies of the past, many may thus conclude that a return to violence is their only way.