The Palestinian Authority is seeking to regroup after the United Nations Security Council officially declared its bid for full UN membership to be dead.

After the Council's announcement Friday, Israeli-Palestinian relations returned to a familiar stasis this week. In talks with the Quartet (the US, UN, European Union, and Russia) yesterday, Israel sought a return to the table with no preconditions and Palestinians insisted on a settlement freeze before resuming talks.

The failed UN statehood bid is a setback for the beleaguered PA and sharpens the debate over its future, nearly two decades after it was set up as a transitional government.

In the past two years, the PA has won international praise for a reform campaign to prepare for independence. But now, amid increasing frustration that the PA is but a Palestinian façade for Israeli occupation of the West Bank, Palestinian officials are signaling they may undo PA gains by voluntarily dismantling the government and handing responsibility for daily management back to Israel.

Hani el-Masry, a Palestinian analyst close to the PA, said that the Palestinian civil affairs minister informed counterparts in the Israeli army that the Palestinian Authority plans to begin transfer authority for health and education back to Israel, potentially turning back the clock 17 years to when Israel had direct control over the daily management of Palestinians.

The counterintuitive move reflects frustration with the lack of progress in the peace process and accompanies an escalation of repeated warnings by PA President Mahmoud Abbas that he will resign if he doubts that negotiations will ever bear fruit.

Mr. Abbas declared Saturday that despite the failed UN bid, he would not dismantle the PA, but speculation persists.

Both Abbas's threats of resignation and other calls for dismantling the PA, are considered brinkmanship because they threaten a vacuum of power in the West Bank that would be a headache for Israel and the international community. It also might reflect uncertainty over what to do now that the Palestinians' controversial campaign for UN membership is moving into a different phase.

Palestinians at a fork in the road

The simultaneous campaign for statehood recognition and threat of dismantling reflects a sort of Palestinians schizophrenia, says Mr. Masry, the director of Badael, a think tank in Ramallah.

"This indicates a crisis in the Palestinian situation. The PA has been sending contradictory messages," he says.

Masry said that Mr. Abbas has yet to make a final decision to on whether to adopt a new strategy for statehood instead of negotiations.

"He has been hesitating. He can’t continue down the old road and he doesn’t have the courage to take a new road."

Palestinian supporters of Mr. Abbas complain the PA – originally established in 1994 as a five-year transitional body ahead of full sovereignty – has turned into a permanent entity that functions as subcontractor of the Israeli military occupation of the West Bank.

"Until now we don’t have any authority. We just distribute money to people," says Bassem Zakarneh, chairman of the Palestinian Authority workers union. "Israel wants to control things and make us like the army’s civil administration. Israel must be responsible for all things, and we will go back to resisting the occupation."

Scare tactic?

Just over two weeks ago, a top governing body Mr. Abbas’ Fatah party commissioned a committee to reconsider the future of the Palestinian Authority. The talk of actually dismantling the PA comes amid fear that the autonomy government might go bankrupt if both Israel and the US stop transferring money to it as a sanction for the Palestinian statehood campaign at the UN.

On Nov. 1, Israel froze payment of about $100 million in monthly tax money that it collects on the PA’s behalf – move made in protest over the admission of the Palestinians to UNESCO. That puts monthly payment of 152,000 employees at risk, but the PA was able find the money to pay the most recent round of salaries on time.

Earlier last week, UN Middle East Envoy Robert Serry warned Israel and the international community that Mr. Abbas and the Palestinians’ warnings should be taken seriously by Israel.

"I don't want to sound apocalyptic – but if things go wrong don't expect the international community to bail you out," Mr. Serry told the liberal Haaretz newspaper, speaking about Israel. "We will not pay the bill."

Others think that Abbas and his Fatah party aren’t about to forfeit their power and financial aid so quickly for fear that Hamas is liable to move into the vacuum and displace them.

"They are using it as a scare tactic to the international community. I don’t think they believe that the Israeli government cares. The international community may back them by pressuring the Israelis," said a Western diplomat based in the region. "When you drive around Ramallah you see so many SUVs and so much money and its all because of the PA. Abbas wants to leave a legacy, but if he packs up the PA, he will leave chaos behind him."

Mohammed Shtayeh, a former Palestinian Authority cabinet member and peace negotiator, says that leaders in Fatah want to redefine how the PA operates rather than dismantling it. Palestinian officials said they might rethink cooperation with Israel, especially collaboration in the West Bank between Israeli and Palestinian security agencies.

Why it might backfire

A Hamas-aligned Palestinian lawmaker assailed the talk of dismantling the PA as "an act of desperation" by Palestinian officials who want to show constituents that they are standing up to the Israel at a time negotiations are deadlocked. "Dismantling the PA will not serve Palestinians, but stopping cooperation will fulfill our goals," said Ayman Daraghmeh, a legislative council member from the Hamas backed Reform and Justice party.

Voluntarily dismantling the PA might backfire by hurting the popularity of Abbas, also known as Abu Mazen, warns Alaa Yaghi, a legislator from his Fatah party. "Most of the people would never understand why Abu Mazen would make this decision. They would blame Abu Mazen and the Fatah leadership."

Indeed, Said Samouri, an employee in the education ministry says he opposes such a move because it would deprive his family of some $1,300 in monthly salary.

"I cannot afford not to have my salary. I don’t have land to rely on," he said.

"Dismantling the PA is an extreme decision and I don’t think Abu Mazen should resort to it now. He should let diplomacy take its course. I am a patriot, and I want to support my government, but I have no way to live except for me and my wife’s salary."

Tactic to boost leverage?

Most Israeli observers see talk of a dismantling of the PA as a threat aimed gaining points at the negotiating table when the sides return to talks.

After years of similar warnings, however, few in Israel take the Palestinians at their word. Still, such a scenario would "expose us as an occupier nation against a civilian population with no protection – a sensitive legal and public relations situation," said Moshe Marzouk, a former advisor on Arab Affairs in the Israeli army, in an interview with Israel’s Ynet.com online news site..

But Fatah member Daraghmeh is less convinced whether will give Palestinians any new leverage over Israel and tip the strategic balance between the two. Voluntarily giving up on international aid and dramatically increasing unemployment would risk the survival of Fatah. He described the Palestinian's stand-off with the US and Israel over the future of the Palestinian Authority by translating an Arabic expression.

"It’s like biting each other’s fingers," he said. "The one who can handle the most pain will win."