"Israel is one of our closest allies and we and the Israeli people have a special bond that's not going to go away," said President Barack Obama to Fox News Wednesday, March 17, after denying any crisis in the relationship. DEBKAfile's Washington sources note that denial makes a lot of sense for the president because it lets him off the hook for dealing with it. 
However, in Jerusalem, prime minister Binyamin Netanyahu called his inner cabinet into its second session on the crisis that same night. The seven ministers were asked to review the situation after President Obama and secretary of state Hillary Clinton turned down their initial proposals for easing the upset and laid down three pre-conditions for restoring normal relations with Jerusalem:
1.  The Netanyahu government must extend the 10-month freeze on West Bank settlement construction to include East Jerusalem;

2.  When the moratorium runs out in September, it must be renewed for the duration of peace negotiations with the Palestinians;
3. Israeli must make more concessions to the Palestinian Authority and its chairman Mahmoud Abbas.
The Israeli government was informed that until those conditions were met, its ministers would not be received in Washington by high-level American officials - a virtual boycott, which downgrades the normal diplomatic, strategic and security exchanges between the two administrations to the level of senators and the special Middle East envoy George Mitchell.
Netanyahu tried offering the Obama administration a number of compromise proposals, such as the suspension of construction in East Jerusalem and the city's outlying Jewish suburbs until September, but they were rejected, as was an offer to prohibit further Jewish purchases of land and buildings in Jerusalem's Arab districts during peace negotiations.

Obama and Clinton made it clear they would brook no departures from their three demands, which Israel is required to treat as an ultimatum.
Neither party to the difference has mentioned the US administration's fourth condition for resuming normal relations:  an Israeli commitment to refrain from attacking Iran's nuclear program without prior US consent. Because that commitment has not been offered, administration officials are continuing to hammer Israel in every possible arena. Indeed, the gloves are now off in earnest for insinuations that Israel's settlement policy is the root-cause of Iran's drive for a nuclear bomb and of the conflicts endangering American lives in combat in Afghanistan and Iraq.

Vice President Joe Biden launched this drive, when he reportedly attacked Netanyahu for the announcement of 1,600 new homes in East Jerusalem by saying: "What you are doing here undermines the security of our troops who are fighting in Iraq, Afghanistan and Pakistan."

A much-admired American military figure, CENTCOM chief, Gen. David Petraeus, was the next US official to put this linkage into words. In his briefing to a Senate panel, he said Wednesday, March 16:  Clearly the tensions on these issues [with Israel] have enormous effect on the strategic context in which we operate in the Central Command's area of responsibility."

The general denied he had as yet formally asked for the Palestinian territories to be transferred to his command, but added: "In fact, staff members at various times have discussed asking for the Palestinian territories to be added to CENTCOM's turf."
DEBKAfile's military sources explain that, if approved, this step would be tantamount to providing the Palestinians with an American military umbrella against Israel.
More than one friend of Israel demurred against the Petraeus suggestion.

Former presidential candidate, Republican Senator John McCain, caught on fast to the way the wind is blowing in Obama's Washington: During his testimony, he put in: "Isn't the issue not the issue of settlements as much as it is the existence of the state of Israel…? So maybe you could put it all into the larger context of what needs to be done to reduce tensions on theUS's closest ally and friend in many respects."
The general did not rise to the senator's challenge, except for a polite: "Absolutely true."
Some of the more respectable US and British media are playing up the theme that Israel has shot itself in the foot and therefore deserves what's coming, namely escalating punishment from the Obama administration.