High on a West Bank hilltop, and in a Jerusalem courtroom, a legal battle has been joined that illustrates more starkly than any diplomatic impasse one of the most intractable obstacles to Israeli-Palestinian peace.

Five Palestinian landowners are suing the Israeli Government to recover income that they claim to have lost because a Jewish settlement prevents them from farming their land. Ownership of the land is not in dispute. It is officially registered to the Palestinian claimants. Nor is this the first suit to accuse the Government of failing to act against illegal settlers. But it is the first to highlight so awkwardly the economic impact on Palestinians of settlement building; the harm that this does to the standing of moderate Palestinians seeking a two-state solution; and the abject failure of Ehud Olmert, the outgoing Israeli Prime Minister, to do anything about it.

For Israel as a whole the settlements represent a looming ordeal. If Mr Olmert's presumptive successor is serious in her pursuit of a permament peace deal - and the signs are that she is - some of them at least will have to be dismantled. The cost in both emotional and political pain will make Israel's traumatic withdrawal from Gaza three years ago look straightforward by comparison.

The Government's position on new West Bank settlements - official rejection accompanied by de facto acquiescence - has not changed since Ariel Sharon, the former Prime Minister, succumbed to a coma two years ago. But change it must. Israel has long since been unable to count on European support for any aspect of its dealings with the Palestinians. But it needs the backing of the US as the region's irreplaceable peacebroker, and that backing cannot be unqualified as long as so-called wildcat outposts continue to spring up on Palestinian land: a freeze on such settlements was agreed in principle at the 2007 Annapolis summit.

As a military icon and architect of the Gaza withdrawal, Mr Sharon had the moral authority to demand forbearance and even concessions on the West Bank. Mr Olmert had none. As a result, settlement building surged on his watch even as he attempted to pursue peace negotiations with Mahmoud Abbas, the Fatah leader.

The Palestinians, of course, have given Israel no reason to grapple with the difficult issue of the settlements. They have been occasional partners in the peace process, if not openly and violently hostile to it. In some places, the Israel Defence Forces have sought to rein in egregious new settlements. The withdrawal from Gaza showed that the country was willing to make unilateral sacrifices in the interests of peace. But in the post-Sharon years, Israel has fallen short of its best intentions.

Whoever succeeds Mr Olmert will have to confront this reality: new West Bank settlements and the infrastructure linking them have undermined the Palestinian economic recovery without which Mr Abbas will have nothing to show for his moderation, leaving the Palestinian future to Hamas. A formal moratorium on new settlements is therefore in Israel's long-term national interest. Properly enforced, it would constitute a major step along the dog-eared “road map” towards peace.