The Israeli prime minister Binyamin Netanyahu is not being honest with his fellow Israelis by insisting that settlement building is compatible with a peaceful future between Israelis and Palestinians, or that the colonisation of occupied East Jerusalem "in no way harms" Palestinians and is not in any sense different from building in Tel Aviv.

Limiting or freezing settlement construction has been at the heart of all recent peace efforts because the settlements make the borders of a future Palestinian state more difficult to conceptualise, let alone determine, and increase the frequently belligerent Israeli constituency opposed to meaningful territorial compromise.

At the political level, they make permanent status negotiations very difficult for the Palestinian leadership because of the legitimate Palestinian fear of being once again drawn into a peace process that is all process and no peace. During the Oslo era in the 1990s, when Palestinians believed they were negotiating an end to the occupation, in fact the number of Israeli settlers more than doubled. Because of this experience and the practical problems settlements create for the creation of a Palestinian state, settlement building undermines the viability and credibility of negotiations and negotiators. Settlement activity ensures that the status quo between Israel and the Palestinians is not a manageable flat plane but rather is a downward spiral of ever-increasing complication, bitterness and difficulty.

However, in his present coalition Netanyahu is surrounded by people to his political right who are committed to settlement activity, especially in occupied East Jerusalem. While he presented the partial, limited settlement moratorium to the United States as a major concession, his government has taken numerous steps to ensure continued expansion of the Israeli presence in much of the West Bank and above all in Jerusalem. The recent confrontation with the Obama administration over new settler housing units in Jerusalem announced during the US vice president Joe Biden's trip to the region reflected the unbridgeable divide between Washington's expectations and the demands of the rightwing parties in Netanyahu's coalition.

The confrontation has placed Israel settlement activity under an even more powerful microscope than it already has been. Israeli colonisation of East Jerusalem is not just a Palestinian problem now, it has become an American problem as well, and that is a serious complication for any Israeli leader who wants to preserve political relations with the Obama administration.

It appears that the confidential new US-Israel understandings that defused the confrontation involved Israel's agreement that upcoming negotiations will include all core issues, including Jerusalem, something Netanyahu had been trying to avoid for many months. Proximity talks are therefore now likely to be structured in the way Palestinians have wanted, and not on Israeli terms. Netanyahu also reportedly agreed to ease the siege of Gaza. Finally, although details on the new understanding regarding settlement activity in Arab East Jerusalem are quite murky, clearly it is going to be more politically difficult and costly for Israel from now on.

Obviously, all of this is far short of a real settlement freeze, and serious progress on peace is eventually going to require that. However, the confrontation has delivered significant gains to the Palestinians. The bottom line is this: the Palestinians had been willing, although extremely reluctant, to go back into proximity talks without a clear agenda or terms of reference. Now, they will be able to go into them with much more satisfactory arrangements. Clearly this is a gain to be built upon, not squandered.