After weeks of empty rhetoric and very little active diplomacy, America’s peace efforts in the Middle East have now come to a crossroads.

Violence that cost the lives of eight Israeli religious students in Jerusalem and 120 Palestinians in Gaza threatens to plunge the area into a new phase of an old conflict.

That would close the door on any hopes of a breakthrough at the negotiations that President Bush promised in January could deliver an historic agreement by the end of the year for the creation of a Palestinian state.

To an outsider, it might be tempting to view the latest cycle in the hostilities as more of the same old Israeli-Palestinian feuding that has marked the Middle East conflict for the past 60 years.

But two aspects of the recent violence are cause for particular concern.

Hamas has proved that it has the weapons and organisation to hit Israel at will. It did this by firing Iranian-supplied Grad missiles at the southern port city of Ashkelon, a serious escalation from the home-made devices that have until now been directed at the town of Sderot, just outside the Gaza Strip.

The militant group also rattled confidence in security in and around Jerusalem.

Alaa Abu Dheim, the seminary gunman, is a resident of Israeli-controlled East Jerusalem, showing that the controversial security fence meant to segregate Israelis from Palestinians on the West Bank is no protection against a determined enemy.

Ehud Olmert, the Israeli Prime Minister, now has two options. He can bend to growing public pressure and order the Israeli Defence Forces to re-enter the Gaza Strip, three years after the IDF was withdrawn, in an effort to silence Hamas rockets. He can also tighten controls on the movement of Palestinians, particularly those seeking to enter Jerusalem.

The first move would probably cost hundreds of lives with no guarantee of success. The second would further erode any hopes of progress in talks with Mahmoud Abbas, the Palestinian President. He had been promised good will gestures from Israel, like the relaxation of controls on the movement of Palestinians and the release of Palestinian prisoners.

Israel had also pledged to halt the expansion in the West Bank of Jewish settlements, whose supporters were among those killed in Thursday’s attack.

So far Israel has shown restraint. Mark Regev, the government spokesman, insisted that Israel would not seek to “punish moderate Palestinians” for the actions of militants.

There are also indications that Washington too is showing a more pragmatic approach to the problem. After her latest visit to the Holy Land this week, Condoleezza Rice, the US Secretary of State, appeared to encourage an Egyptian initiative to open talks with Hamas and secure a ceasefire in Gaza.

Only if the group is engaged and the situation allowed to return to some form or normality can there be any hope of progress.

Much of what happens next could depend on two looming summits. Later this month Syria is due to host the annual Arab League meeting in Damascus. The Syrians and their Iranian allies have shown no desire to halt support for Hamas and their Lebanese allies Hezbollah. It will be up to moderate Arab leaders to express their support for the peace initiative, which they all signed up to last November in Annapolis.

In May President Bush and other world leaders will visit Israel to mark the country’s 60th anniversary. His hosts and the rest of the world will be looking to him to pull off a feat of truly biblical proportions.

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