In June, Barack Obama declared to the consternation of Israel that “the United States does not accept the legitimacy of continued Israeli settlements”. Since then the Israeli prime minister, Benjamin Netanyahu, has chipped away at the principle of a total freeze on settlement building with what looks like increasing success.

After discussions in London with Mr Obama’s Middle East envoy, George Mitchell, the Israelis appear to have persuaded Washington to exclude East Jerusalem from the proposed settlement freeze. This means that, during the proposed peace talks, construction of homes for Jewish settlers will proceed apace within the boundaries of Jerusalem, which were greatly expanded by Israel to take in sections of the West Bank.

Under what the Israelis call a “compromise” with Mr Mitchell, it looks like the freeze will turn into a moratorium of around six months. If it is not time-delimited, it will at least have an exit clause that allows the Israelis to escape while blaming the other side. If the Israelis have their way, existing construction projects in the settlements will be allowed to run their course. This demand is justified in Israeli eyes by the needs to allow for “natural growth” of the settler population. But it ignores the fact that almost half of the increase in settler population is due to state-subsidised population transfer from Israel and abroad, not births.

At the same time Mr Netanyahu has sought to change the basis of the future peace plan. He has been talking of “economic peace”, under which the West Bank economy would be allowed to grow under Israeli tutelage. Since the economy has been strangled to near death by Israel, stupendous growth from a low base would be easily achieved. But the Palestinians will not buy this: what Israel allows to flourish can be strangled or bombed again.

The second diversionary tactic is to demand that the Palestinians accept Israel as a Jewish state. This undermines the whole basis of international peace-making since 1967, the exchange of land for peace. The practical difficulties in dividing the land between Israel and Palestine – even though the borders are fairly clear – are enormous. To add further demands is clearly a spoiling tactic.

From the Arab point of view, the net effect of the past three months is hardly positive. In Israel Mr Netanyahu – a politician with a reputation as a mountebank – has become more popular and more confident as he has pursued his stand-off with Washington. Arab opinion is becoming disillusioned with Mr Obama. If there are any hopes they rest on Mr Netanyahu, who has spent his life fighting the idea of a Palestinian state, morphing into a great statesman who will make peace with the Arab world. Not many would bet their homes on this happening.

The fact that Mr Obama can be beaten down, even before he has launched his peace plan, will come as no surprise to Arab governments. Faced with demands that they make early moves towards recognising Israel, they are sitting on their hands, having been tricked in the 1990s. In the years after the Oslo Accords were signed by Israel and Palestinians, Israel got a premature peace dividend in the form of global approval and foreign investment, while settlements mushroomed on Palestinian territory. Yasser Arafat, the late Palestinian leader, was partly to blame for his chaotic attitude to the negotiations: an end to Jewish settlement building was implicit in the spirit of the Oslo Accords, but nowhere was it written in black and white. So it is hardly surprising that Arab states will not move an inch until they see exactly what Israel is committed to do.

Could it have been different? I believe the quotation at the start of this article – “the United States does not accept the legitimacy of continued Israeli settlements” – has much to answer for. To the layman, it might suggest that Washington views the settlements as illegal. But Mr Obama is a lawyer and knows there is a big difference between declaring something illegal and using the convoluted phrase which he pronounced. The word “continued” suggests that existing settlers might stay where they are.

It is often forgotten that in the 1970s the US held to the view that Jewish settlements on occupied land were illegal. Under Ronald Reagan, Washington tacitly accepted them, while issuing statements on the lines that they were “unhelpful” or an “obstacle to peace”. A return to the use of the word “illegal” would clarify the issue. It would show that the settlements are built on territory which is Palestinian by right, not Israeli territory over which Mr Netanyahu might make a concession. The time is surely right for a return of this simple word now that the Bush administration, with 2its cavalier approach to observing the Geneva Conventions, has departed.

Supporters of this view point out that the Israelis only understand hard ball. Flynt Leverett, a former Middle East director at the US National Security Council, has noted that the 1970s, when the US did not bow so readily to Israeli interests, saw Israel sign disengagement agreements with Egypt and Syria and return Sinai to Egypt.

The past never returns, and it is foolish to wish for it. Israel is stronger than in the 1970s, less dependent on US aid, and Washington appears to need Israeli intelligence in its looming confrontation with Iran. The relationship has changed. But still, a simple word would reassure the world that Mr Obama intends to pursue the two-state solution to the end.