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US takes on Israeli-Palestinian conflict and Iran's nuclear programme in one massive gamble

Washington's plan to link two intractable problems raises international hopes of deal to restart the Middle East peace process

• Julian Borger and Ewen MacAskill in Washington
• guardian.co.uk, Tuesday 25 August 2009 21.25 BST

Jewish settlers discuss biblical text at the former Israeli army outpost of Shdema, south of Jerusalem. The future of such outposts will prove crucial to a Middle East peace treaty. Photograph: Gali Tibbon

The Obama administration's approach to two of the world's most intractable and dangerous problems, the Israeli-Palestinian conflict andIran's nuclear programme, is to link them together in the search for a solution to both.

The new US strategy aims to use its Iran policy to gain leverage on Binyamin Netanyahu's government.

Sanctions planned against Iran's energy sector if Tehran does not compromise on uranium enrichment by the end of next month are not only aimed at pre-empting Israeli military action; they are also a bargaining chip offered in part exchange for a substantial freeze on Jewish settlements in the West Bank.

"The message is: Iran is an existential threat to Israel; settlements are not," said one official close to the negotiations.

However, the strategy is fraught with risks. Coupling the two huge complex issues could end up complicating them further. Moves against Iran's oil and gas industry could also end up destroying hard-won multilateral co-ordination, by alienating Russia and China, while failing to inflict much damage on the Iranian regime. Memories of Iraqi sanctions-busting are still fresh.

"This idea that a petroleum embargo is a silver bullet for the Iran problem is misguided. Iran has a lot of land borders," a European official said.

For the strategy to work, such potentially fundamental flaws will have to be ironed out soon. The Middle East peace process and the international stand-off over Iran's nuclear programme are heading towards a critical shared deadline at the end of next month.

By the time the UN general assembly and the G20 leaders convene, between 23 and 25 September, Washington wants to have struck a preliminary deal between Israel and the Arab world, to allow Barack Obama to outline a new peace plan, probably at the general assembly. At the same time, Iran must show compromise over its enrichment of uranium, or the wheels will start turning towards punitive sanctions.

Time is therefore short, but the initial signs of synergy are promising.

Netanyahu is heartened by what he sees as US and western European determination to impose "crippling" sanctions on Iran, a phrase used by Hillary Clinton that the Israeli prime minister repeated at his meeting with Gordon Brown.

Israel is no longer threatening military action to curtail Iran's nuclear programme, and Netanyahu is signalling readiness to bargain on the Jewish settlements.

European diplomats believe Netanyahu will be better able to keep his coalition together through a freeze on settlements if he can demonstrate western resolve on Iran.

Meanwhile, the Gulf Arab states are increasingly nervous about the prospect of a nuclear Iran, and the offer of a US security umbrella, hinted at by Clinton last month, will help cement their contribution to an Israeli-Palestinian deal, in the form of recognition.

However, two big question marks hang over this strategy. Can sanctions against Iran's oil and gas sector work, and can they generate sufficient regional momentum both to restart Israeli-Palestinian talks and to carry those negotiations through to a settlement before the end of Obama's first term, as the White House is hoping?

Middle East analysts in Washington share the growing confidence of the Obama administration that he can secure a deal on resuming talks. But they are sceptical that the gap will be easily or quickly closed between an Israeli government filled with rightwing hawks, a weak Palestinian leadership and cautious Arab states.

Even if all the pieces were to fall into place for Obama, they doubt a peace deal could be achieved and implemented in less than six to seven years. Aaron David Miller, a former state department adviser on Arab-Israeli affairs, said: "I think they will succeed in getting some sort of announcement and event. Beyond that, I doubt they will get an agreement on the big issues."

Miller, author of The Much Too Promised Land: America's Elusive Search for Arab-Israeli Peace, said he expected the Israelis and Palestinians would quickly become deadlocked over borders, the future of Jerusalem and the future of Palestinian refugees.

The main decision for Obama then would be whether he waits until the Israelis and Palestinians have exhausted negotiations and steps in to bridge the gap, or whether he lays down a rough idea of the US's envisaged peace settlement early on.

David Makovsky, who co-authored a book on the Middle East with White House adviser Dennis Ross, said: "I think the US will only put forward a bridging proposal after negotiations. You can bridge over a lake or river but not an ocean. They will not put forward an Obama plan. He cannot come in at beginning but only at end."

Meanwhile, by hitching prospects of Middle East peace to the west's ability to curb Iran's nuclear programme, Washington is increasing the chance that a breakdown in Iran policy will upset the precarious Israeli-Palestinian balance.

One variant of the plan is to target Iran's dependence on foreign petroleum. Iran has the third biggest proven oil reserves in the world, but decades of under-investment means that the country imports 40% of the petrol and diesel it needs to keep its economy functioning, much of it from the United Arab Emirates and India. It is a significant vulnerability, but exploiting it will be problematic.

Imposing an embargo by gunboat would be tantamount to an act of war. Punishing oil trading companies who sold sell to Iran would trigger bitter trade rows, and invite the widespread sanctions-busting witnessed throughout the attempt to isolate Iraq in the 1990s.

Getting UN-mandated sanctions on Iran's oil and gas sector would mean convincing Russia and China, and that will be a tough sell. China in particular is reliant on Iranian oil and gas. One suggestion is to have Saudi Arabia fill the gap in China's energy needs for the duration of sanctions, in the hope of winning Chinese compliance and avoiding an oil price spike that could reverse the tentative signs of recovery in the global economy. But the response of the Iranian regime will remain a wild card, and financial markets will be easily spooked by any trouble in the global oil trade.

Another, less risky alternative would be to cut sales of equipment and technology that Iran needs to develop its oil and gas production and exports. The tactic would be less dependent on Russian and Chinese co-operation, as the best technology in the field still comes from the west, but its impact might not be sufficiently immediate to maintain Israeli support.

The Obama administration is setting out to juggle two potentially explosive global crises, while walking the tightrope of a shaky and nervous global economy. It is not going to be easy, but Washington appears to have decided it has no option but to try.