Despite the collapse of the direct peace talks, US officials insist that they will continue working toward a two-state solution, as part of their wider efforts to secure peace in the Middle East. The US envoy, George Mitchell, has resumed his shuttle diplomacy, and has proposed the holding of separate but parallel talks with both sides for a period of six weeks-mirroring the indirect "proximity" talks that preceded the three rounds of direct talks last September.

Meanwhile, the Palestinians-frustrated with Israeli intransigence over the settlement issue-seem determined to press ahead with their efforts to secure a UN resolution that recognises Palestine as an independent state. This idea has already received the backing of a number of Latin American countries. However, it is unlikely to make much headway, given the clear opposition of Israel and the US as well as a lukewarm response in Europe. Indeed, it is difficult to see how a lasting peace can be achieved without Israel and the Palestinians fleshing out the details at first hand around the negotiating table. The resumption of direct talks therefore remains the essential, but elusive, first step along this road.

Even if direct talks were to resume, many Israelis doubt the ability of Mahmoud Abbas, the president of the Palestinian Authority, to enforce any agreement that he might make-not least because of the fierce opposition of Hamas, the Palestinian Islamist group that controls the Gaza Strip. At the same time, many Palestinians are distrustful of Mr Netanyahu. In terms of substantive issues, the borders for a future Palestinian state, the status of Jerusalem and the right of return of Palestinian refugees remain major stumbling blocks. Mr Netanyahu is also demanding that Israel be recognised as a Jewish state, something that the Palestinians have ruled out. They believe that such an acknowledgement not only would be to the detriment of Israel's Arab citizens-who constitute around 20% of the population-but would obstruct the right of return of Palestinian refugees.

Israel will remain focused on the strategic threat from a potentially nuclear-armed Iran but is not expected to attack Iran's nuclear installations unless it has the support of the US. This support is unlikely to be forthcoming. Instead, the US is attempting to exert increased pressure on the Islamic Republic through economic channels; its call for tougher sanctions received the backing of the UN Security Council in June. The US administration will also seek to convince Israel that a final-status agreement with the Palestinians is the best means of neutralising the potential threat from Iran, by increasing the latter's isolation in the region. Meanwhile, tensions between Israel and Hizbullah, a Lebanese Shia group, will remain high. The exchange of fire on Israel's border with Lebanon in early August represents the most serious confrontation in that area since the July 2006 war. Israel is also watching closely to see whether the Lebanese tribunal that has been investigating the assassination of former prime minister, Rafiq Hariri, directly implicates Hizbullah. If it does, there is a risk of renewed instability in Lebanon, with potentially negative overspill for Israel. There has also been a renewed upsurge in military tensions over Gaza. Israeli air strikes on the Hamas-controlled territory have been accompanied by rocket fire from the Strip aimed at neighbouring Israeli towns.