It is not too late to create a Palestinian capital in Jerusalem alongside Israel's capital--unless this arrangement has to be part of a comprehensive, end-of-claims settlement between Israelis and Palestinians. In that case it is, and probably always has been, impossible.

Some 18 years of an Israeli-Palestinian peace process, including two periods of intensive final status negotiations, in 2000 and 2008, have generated a number of lessons that we ignore at our peril. The relevant one for this discussion concerns the distinction between East Jerusalem as a Palestinian capital and the disposition of the Jerusalem "Holy Basin": the sites sacred to three religions that link the Old City via the City of David/Silwan with the Mount of Olives.

Despite ongoing Israeli settlement inside and around East Jerusalem, a Palestinian capital can still be carved out there. Two Israeli prime ministers not previously known for their dovish politics, Ehud Barak and Ehud Olmert, offered the Palestine Liberation Organization provisions for a capital in East Jerusalem and for attaching the city's Arab neighborhoods to a Palestinian state created from the West Bank and Gaza Strip. So did US President Bill Clinton, toward the end of his term. Even some right-wing Israeli political leaders like Avigdor Lieberman have acknowledged the possibility of a Palestinian capital in geographic East Jerusalem. At the end of the day, few Israeli Jews really want the 250,000 Palestinian Arab residents of Jerusalem to remain part of Israel.

Not that the two sides have ever formally agreed on the geographic parameters of a Jerusalem divided into two capitals. But this issue appears to be far more resolvable than the disposition of the Holy Basin, and particularly the Temple Mount/Haram al-Sharif, in the heart of Jerusalem. Here we encounter a clash between a Jewish narrative of 3,000 years and an Arab-Muslim narrative of 1,500 years. Proposals to make God the sovereign (the late King Hussein of Jordan), to divide sovereignty horizontally between layers of the Mount (Clinton) and to deliver the entire Holy Basin to a five-nation international consortium with a Muslim Arab majority (Olmert) have all failed. The Palestinian leadership appears to insist on nothing short of blanket acceptance of full Palestinian sovereignty that ignores or obliterates Israeli-Jewish history on the Mount.

In recent years, this deadlock has been compounded by Israeli archeological digs and development of sites near the Mount and in the City of David, or Silwan. In Palestinian eyes, these projects are geared to uncover and display the remains of biblical Jerusalem at the expense of layer upon layer of non-Hebrew Jerusalem culture, including a millennium and a half of Arab and Muslim civilization. They also threaten to dislodge the current Palestinian Arab residents of Silwan.

As long as the Oslo rules of final-status negotiations prevail, and all final-status issues have to be resolved before any agreement can be reached, these Holy Basin issues, like the refugee/right of return issue, will hold up a deal. The gap between the two sides on these "existential" questions with their total clash of historical-religious narratives is, for the foreseeable future, unbridgeable.

Herein lies the positive aspect of the current Palestinian initiative to ask the United Nations for recognition of a Palestinian state within the 1967 lines with East Jerusalem as its capital. In turning to the international community, the PLO is acknowledging the need and displaying the capacity to prioritize territorial and sovereignty issues over the existential deal-breakers of right of return and the disposition of holy places.

This could put us on the road to a resolution of the territorial and security questions that currently divide us. By creating a Palestinian state with a capital in Jerusalem before trying to resolve the Holy Basin issue, it could render the rest of the conflict much more manageable.

Only in this way can Jerusalem still be the capital of two states.