So far this week, Mr. Netanyahu’s hard-line government, defying the Western powers, has approved construction of more than 6,000 new housing units. The approvals follow an announcement late last month that Israel would continue planning for new development in the E1 area — a project northeast of Jerusalem that would split the West Bank and prevent the creation of a viable contiguous Palestinian state. Ban Ki-moon, the secretary general of the United Nations, has called this project an “almost fatal blow” to a two-state solution.

Mr. Netanyahu gave the go-ahead in retaliation for the United Nations vote to elevate the status of Palestine. Israel is also withholding $100 million in tax revenues it collects monthly for the Palestinian Authority, which needs the money to pay salaries. As a result, the Palestinian prime minister, Salam Fayyad, on Thursday called for a boycott of Israeli goods.

Since the 1993 Oslo Accords, hopes for Mideast peace have envisioned two states, for two peoples, living side by side in security. But there is increasing talk now of a one-state future, which would be disastrous to both sides. By absorbing the West Bank, Israel would risk its character as a Jewish state because Israeli Jews could become a minority in their own country. Israelis would also have to decide whether to give Palestinians equal rights, the denial of which would harm Israel’s standing as a democracy.

Mr. Netanyahu — his eye on Israel’s Jan. 22 elections — seems unconcerned. On Wednesday, all members of the United Nations Security Council except the United States condemned the new construction. The State Department criticized the settlement activity separately on Tuesday, but the Obama administration has resisted joining criticism of Israel.

The Palestinian president, Mahmoud Abbas, is a weak leader who has squandered chances to negotiate peace. But he is the best partner Israel has, and Mr. Netanyahu’s belligerence, including the settlement activity, increases the stature of Hamas, Mr. Abbas’s violent rival.

It is Hamas that has been shooting rockets into Israel, and it is Hamas’s leader, Khaled Meshal, who has vowed never to recognize Israel. Mr. Abbas, by contrast, has forsaken violence and criticized Mr. Meshal for not recognizing Israel. The space for a peace deal is shrinking. While no one can impose a peace, the United States is still the most credible mediator. At a minimum, President Obama should be exhorting both sides to halt retaliatory measures. Arab and European leaders also need to show leadership. This is not a problem that will fix itself.