The classified documents show Palestinians willing to go to extreme lengths and Israel holding a firm line on any peace deal

Who will be most damaged by this extraordinary glimpse into the reality of the Israeli-Palestinian peace process? Perhaps the first casualty will be Palestinian national pride, their collective sense of dignity in adversity badly wounded by the papers revealed today.

Many on the Palestinian streets will recoil to read not just the concessions offered by their representatives – starting with the yielding of those parts of East Jerusalem settled by Israeli Jews – but the language in which those concessions were made.

To hear their chief negotiator, Saeb Erekat, tell the Israelis that the Palestinians are ready to concede "the biggest Yerushalayim in Jewish history" – even using the Hebrew word for the city – will strike many as an act of humiliation.

Referring to Ariel Sharon as a "friend" will offend those Palestinians who still revile the former prime minister as the "Butcher of Beirut" for his role in the 1982 Israeli invasion of Lebanon.

Telling Tzipi Livni, Israel's then foreign minister, on the eve of national elections "I would vote for you" will strike many Palestinians as grovelling of a shameful kind.

It is this tone which will stick in the throat just as much as the substantive concessions on land or, as the Guardian will reveal in coming days, the intimate level of secret co-operation with Israeli security forces or readiness of Palestinian negotiators to give way on the highly charged question of the right of return for Palestinian refugees.

Of course it should be said that this cache of papers is not exhaustive and may have been leaked selectively; other documents might provide a rather different impression. Nevertheless, these texts will do enormous damage to the standing of the Palestinian Authority and to the Fatah party that leads it. Erekat himself may never recover his credibility.

But something even more profound is at stake: these documents could discredit among Palestinians the very notion of negotiation with Israel and the two-state solution that underpins it.

And yet there might also be an unexpected boost here for the Palestinian cause. Surely international opinion will see concrete proof of how far the Palestinians have been willing to go, ready to move up to and beyond their "red lines", conceding ground that would once have been unthinkable – none more so than on Jerusalem.

In the blame game that has long attended Middle East diplomacy, this could see a shift in the Palestinians' favour.

The effect of these papers on Israel will be the reverse.

They will cause little trouble inside the country. There are no exposés of hypocrisy or double talk; on the contrary, the Israelis' statements inside the negotiating room echo what they have consistently said outside it. Livni in particular – now leader of the Israeli opposition – will be heartened that no words are recorded here to suggest she was ever a soft touch.

Still, in the eyes of world opinion that very consistency will look much less admirable. These papers show that the Israelis were intransigent in public – and intransigent in private.

What's more, the documents blow apart what has been a staple of Israeli public diplomacy: the claim that there is no Palestinian partner. That theme, a refrain of Israeli spokesmen on and off for years, is undone by transcripts which show that there is not only a Palestinian partner but one more accommodating than will surely ever appear again.

Where does this leave the peace process itself? The pessimistic view is that what little life remained in it has now been punched out. On the Palestinian side these revelations are bound to strengthen Hamas, who have long rejected Fatah's strategy of negotiation, arguing that armed resistance is the only way to secure Palestinian statehood. Hamas will now be able to claim that diplomacy not only fails to bring results, it brings national humiliation.

But the despair will not be confined to the Palestinians. Others may well conclude that if a two-state solution is not possible even under these circumstances – when the Palestinians go as far as they can but still fail, in Livni's words, to "meet our demands" – then it can never be achieved. This is the view that sees Israelis and Palestinians as two acrobats who, even when they bend over backwards, just cannot touch: the Palestinian maximum always falls short of the Israeli minimum.

The optimistic view will hope these papers act as a wake-up call, jolting the US – exposed here as far from the even-handed, honest broker it claims to be – into pressing reset on its Middle East effort, beginning with a determination to exert proper pressure on Israel, pushing it to budge.

It goes without saying that in any wager between optimists and pessimists in the Middle East, the smart money is usually on the latter.