The two-state solution - an independent Palestinian state in the West Bank and Gaza, alongside a safe and secure Israel - has for two decades been the central plank of American peacemaking efforts in the Middle East.

Yet support for the approach is dwindling both among Israelis, who have just elected a prime minister reluctant even to mention the phrase and among Palestinians, who fear being handed a series of loosely connected cantons divided by Jewish settlements and with no real sovereignty.

The development of the area known as E1, the last open parcel of land connecting Arab east Jerusalem to the West Bank, would be seen by many here as the final nail in the coffin of the two-state solution. The 1993 Oslo accords, once the shining hope for peace efforts, are tarnished by years of unending bloodshed. This week a Palestinian man killed a defenceless 13-year-old boy with an axe at a Jewish settlement in the southern West Bank.

Binyamin Netanyahu, the new Prime Minister, was forced to make a public pledge to honour the Oslo accords in order to woo the Labour leader Ehud Barak, the tough-talking Defence Minister, into his Government against vehement opposition from much of the centre-left party.

But Mr Netanyahu has long preferred a different solution, what he calls an “economic peace” in which Palestinians receive limited sovereignty in return for economic stimulus packages. The logic is that if the West Bank prospers and attacks decline, Israel can remove its military checkpoints and Palestinians will receive more autonomy.

That has done little to impress Palestinians, who point out that they were doing very well economically when the first intifada started in 1987. And while the Palestinian Authority, dominated by the mainstream Fatah movement, was meant to be a government for Palestinian self-rule, it is increasingly seen as fig leaf for continuing Israeli occupation and as a propped-up bulwark against a Hamas takeover similar to that in Gaza in 2007.

If the E1 development goes ahead, the Fatah old guard will be forced to re-evaluate their position and will probably be pushed into a long-delayed convention of the mainstream movement. That would likely lead to their being swept away by Fatah's Young Turks, who take a far more militant approach to Israel. That could trigger more violence and make the prospects for real peace even more elusive.

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