Israeli settlement construction in the occupied Palestinian territories has proved to be among the most serious irritants in the U.S.-Israel relationship. It is also one of the most significant obstacles to a negotiated settlement. But with direct Israeli-Palestinian negotiations kicking off this week and Israel's partial settlement freeze set to expire in a few weeks, the issue is once again poised to come to the forefront of the Middle East peace process.

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President Barack Obama's administration has already found itself entangled in this issue twice this year -- first when Vice President Joe Biden visited Israel in March, and again when Israeli Prime Minister Benjamin Netanyahu visited Washington later that month. In both cases, Israeli officials announced controversial settlement projects in Palestinian areas of occupied East Jerusalem in a manner that was deeply embarrassing to the Obama administration. During his Israel visit, Biden condemned the settlement construction as "precisely the kind of step that undermines the trust we need right now" in one of the most public manifestations of the perceived rift that had emerged between the United States and Israel since Obama's inauguration.

Israeli settlement construction is also rapidly climbing the ladder of Palestinian concerns. Palestinian leaders vividly recall the long years of negotiations in the 1990s, during which the number of Israeli settlers doubled from 200,000 to 400,000, and now have almost reached half a million. The Palestinian nightmare is that additional years of fruitless talks will provide a stable environment for another major expansion of settlements, which would permanently foreclose the creation of a viable Palestinian state.

From his first day in office, Obama attempted to launch a major effort to restart Israeli-Palestinian negotiations that would begin with an Israeli commitment to freeze all settlement activity. Netanyahu, however, deftly shifted the subject from the West Bank to Jerusalem, on which he had much more support from members of the U.S. Congress and in Israel. In response to U.S. pressure, he issued a partial, 10-month moratorium on settlement construction, which did not include Jerusalem and contained many loopholes, such as the grandfathering of no less than 3,000 settlement housing units deemed to have been started before the freeze began on Nov. 25. This allowed Netanyahu to successfully triangulate between U.S. concerns and the demands of his right-wing coalition partners, but the moratorium will expire on Sept. 26, forcing the prime minister to find another method for remaining in both sides' good graces.

After spending most of last year attempting to get Netanyahu to agree to a complete settlement freeze, the Obama administration came to the belief that the contentious settlement issue was toxic for U.S.-Israel relations and an impediment to the resumption of direct talks. Obama effectively took the issue off the table following the U.N. General Assembly meeting last fall, when he declared that the United States still regarded further settlement activity as illegitimate, but was now focusing on restarting direct negotiations.

The Palestinians, having adopted the U.S. demand for a complete freeze, consequently were placed in an impossible situation. Palestinian Authority President Mahmoud Abbas, after all, was unable to back down on this demand as easily as Obama.

To restart direct talks, the Obama administration therefore needed to find a formula that would allow the Palestinians to return to direct negotiations without a complete settlement freeze. Furthermore, any deal needed to strike a compromise that would prevent the talks from collapsing following the Sept. 26 expiration of the partial moratorium.

Many informed observers have suggested that Obama and Netanyahu reached a private and tacit understanding to resolve this conundrum during the Israeli prime minister's White House visit on July 6. The two leaders may have reached an agreement that Israel need not extend the moratorium but that Israel will still, in practice, restrict building to Jewish areas of Jerusalem and large settlement blocs in the West Bank. These areas are understood by all parties to be the likely subject of a land swap in the event of a final-status agreement. Obama and Netanyahu's deal, as long as it remained unspoken, would preserve Netanyahu's viability with his domestic right-wing constituency while also preventing new land expropriations or incendiary projects in Arab areas of Jerusalem from derailing negotiations.

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