With this week’s new public American- Israeli argument over building plans in Jewish neighborhoods of east Jerusalem, the “peace process” has truly descended beyond tragedy and into bankrupt farce.

All three sides are following what have become predictable behavior patterns, too often insensitive to each other’s needs. But if that is sadly unsurprising in the cases of Israel and the Palestinians, the two protagonists who have been locked in conflict for so long, it is remarkable and hugely counterproductive in the case of the United States, the third party that is supposed to be mediating the differences rather than exacerbating them.

The fact is that Israel and the United States have long formally disagreed about the legitimacy of the entire settlement enterprise, and even about construction in Jewish neighborhoods on east Jerusalem territory captured in the 1967 war, where Israel claims full sovereignty.

Where the Obama administration has differed from many of its predecessors is in making this area of disagreement so publicly central to peace efforts. And in so doing, it has serially derailed the very efforts it is ostensibly seeking to encourage.

BY DEMOLISHING the entire settlement enterprise in Gaza, and by proposing a series of peace agreements that would require the dismantling of the vast majority of West Bank settlements, successive Israeli governments have made plain a readiness to sanction acutely wrenching concessions – giving up central areas of the biblical Land of Israel, and forcing large numbers of Israelis out of their homes – in the cause of a viable, permanent accord.

Meanwhile, by negotiating with Israel over the years, even as building not just in east Jerusalem but across the West Bank continued, the Palestinian leadership was essentially accepting that construction would quietly go on at a relatively low level until an accord was reached – that no Israeli government was going to initiate a bitter confrontation with the potentially affected settlers before the painful deal was done, and that the eventual signature of such an accord would resolve the final status and disposition of the disputed territory.

In repeatedly urging Israel to halt all building over the pre-1967 lines, including in east Jerusalem, however, President Barack Obama and his administration shattered that pragmatic framework.

Ramat Shlomo, the last Jerusalem neighborhood where the announcement of new building plans caused a Netanyahu-Obama flare up, had quietly become home to thousands upon thousands of Israeli Jews before it became a headline issue last March, and was ratcheted up into a full blown crisis when the administration most deliberately flayed Israel publicly over it. As with the neighborhoods of Pisgat Ze’ev and Har Homa, the focus of this week’s row, it is an area that Mahmoud Abbas can never seriously have contemplated would come under the sovereignty of a future Palestine.

Even Binyamin Netanyahu’s unprecedented 10-month freeze on new building in the West Bank wasn’t deemed good enough for this administration, because it didn’t include east Jerusalem – where no conceivable Israeli government would formally order a freeze, whatever it might do quietly in practice. While it was Abbas who frittered away the first nine of those 10 months – in part, it might be noted, during the US-exacerbated Ramat Shlomo tussle – it was Netanyahu who was again pressured to renew the moratorium when it expired. And although, on the ground, there has actually been precious little new building in the West Bank settlements or in east Jerusalem for the past year, this week’s mere announcement of another stage of the approvals process for construction of homes in Har Homa and Pisgat Ze’ev prompted further public expressions of dissatisfaction with Israel from the American president and his secretary of state.

The very bitter irony here is that while the administration evidently continues to believe that pressuring Israel over this issue will help mollify the Palestinians and thus bring them back to the peace table, Abbas himself is telling anybody who’ll listen precisely the opposite. As the Washington Institute’s savvy analyst David Makovsky noted this week, Abbas “felt trapped by Obama’s call for a complete settlement freeze in the spring of 2009.” It meant that he couldn’t now come back to the peace table without it.

“As Abbas has stated both in public interviews and in a private conversation we had in Ramallah this summer, he had never insisted upon a settlement freeze being a precondition for talks during previous negotiations with Olmert. Nor had [his predecessor Yasser] Arafat made this a precondition in negotiations with Rabin and Barak.

“In several public interviews over the last year, Abbas has blamed the United States for instilling a settlement freeze as his own precondition,” Makovsky notes. “Abbas feels Obama, in his words, got him ‘up a tree’ without a ‘ladder’ – he could not be outflanked by appearing to be less pro-Palestinian than President Obama.”

Obama insistently pushed Abbas higher up the tree with his call for an extension of the settlement moratorium at the UN General Assembly in September. And he elevated the hapless PA president a few more branches still this week with his criticism, while in Indonesia, of the “never helpful” new Jerusalem building plans.

OF COURSE, the two directly affected parties haven’t helped matters. Netanyahu could have chosen to extend the settlement freeze – and it can be readily argued that he should have done so in the light of his understanding of Israel’s interests: As he has repeatedly stressed, he regards a substantive peace process as important to Israel, and supports a Palestinian state so long as it cannot threaten Israel militarily and demographically. To that end, he wants to get Abbas back to the direct talks, and another freeze would have facilitated that.

And Abbas, were he genuinely both well-intentioned and courageous, would not have wasted those nine moratorium months, and would have long since signaled to Obama that the US spotlighting of settlement construction was actually doing him more harm than good.

But Netanyahu, having only sanctioned the original freeze under tremendous US pressure, is going to be less and less likely to reinstitute it the more that Washington confronts him directly over the east Jerusalem issue. The man is the leader of the Likud, a party still coming to terms with the demolition of a central policy platform that insisted there could be no second sovereign entity west of the Jordan River. He has already presided over a halt in settlement construction that no prime minister, of Left or Right, had ordered in the decades since Judea and Samaria were captured.

And with the Obama administration making it repeatedly publicly obvious that another West Bank construction halt is not sufficient anyway, since it regards even Jewish neighborhoods in the east of the city as thoroughly illegitimate – how stark a contrast with the Bush administration’s stated acknowledgement of the “new realities on the ground” – there is ever-less incentive for the prime minister to demonstrate further flexibility.

The growing temptation, however misguided, indeed, may be to wait out the Obama era altogether, in hopes of a more understanding American leadership to follow.

Abbas, meanwhile, has for years radiated the sense that he’d really much rather be doing pretty much anything other than leading the Palestinian cause. Whatever his personal readiness for compromise, he lacked the guts or the support, or both, to seize Ehud Olmert’s peace offer (see box). And since Olmert’s departure, he seems to be hardening his positions, recently ruling out even the notion of land swaps – under which Israel would expand sovereignty into the West Bank to annex major settlement blocs, in return for Israeli sovereign territory coming under Palestinian rule.

Abbas knows that Netanyahu, in the most propitious of circumstances, would offer less than Olmert did – and would certainly balk at relinquishing Israeli sovereignty over the Temple Mount and the Western Wall. And so now, gazing down from those high branches to which Obama has raised him, he may find it increasingly difficult to resist the pressure for unilateral moves toward statehood – moves that so many of his colleagues are demanding and that so much of the international community is ready to endorse.

Unilateralism, as I wrote here two weeks ago, will by definition solve none of the core issues in dispute between Israel and the Palestinians, and will create the potential for massively exacerbated conflict. The Obama administration has made publicly clear, though not as stridently as it might, that it considers a Palestinian unilateralist drive to statehood to be unhelpful. How unfortunate, to put it mildly, that its mishandling of the settlement issue is one of the factors now pushing the Palestinians in exactly that dangerous direction.

An Israeli prime minister who may feel his smartest game plan is to play for time, and a Palestinian president who may come to regard unilateralism as his best option. Two sides moving further and further apart, with the US, though so earnestly trying to bring them together, looking more like part of the problem than its solution.