WASHINGTON -- The bleak domestic realities washing over President Barack Obama's White House cloak equally dismal prospects for quickly shepherding Israel and the Palestinians back to peace talks.

As the politically beleaguered president prepared to deliver his first State of the Union address Wednesday night - the symbolic start of his second year in office - Obama was forced to acknowledge he got ahead of himself when he raised hopes of early success by making Mideast peacemaking a top priority of his new administration.

"I think it is absolutely true that what we did this year didn't produce the kind of breakthrough that we wanted," Obama said in a Time magazine interview published last week. "If we had anticipated some of these political problems on both sides earlier, we might not have raised expectations as high."

Solving the Mideast riddle has bedeviled U.S. leaders for six decades. No American leader has managed to foster a breakthrough in the region since President Jimmy Carter's success in negotiating a peace treaty between Egypt and Israel in 1978. Even that, in the end, produced only a cold peace and minimal benefits for remaking relations between Israel and other Arab neighbors.

For most Americans - increasingly angry about double-digit joblessness and perceptions of special treatment for the banks that are held responsible for causing the financial misery - progress in the Middle East is the least of their worries.

For the moment, perhaps.

But Obama made such a big deal out of solving the Israeli-Palestinian puzzle because it remains critical to American security.

Al-Qaida chief Osama bin Laden continues to cite the conflict - and America's close links to Israel - as a key reason and recruiting tool among Muslims for his terror campaign.

Likewise with Iran, where leaders call for Israel's destruction even as they are believed to be moving toward ownership of a nuclear weapon and the missiles that could fulfill that ambition.

Obama's move from optimism and bullishness to pessimism has been remarkable.

"It's an uncharacteristically honest assessment for a leader" who put so much store in brokering Mideast peace, said Aaron David Miller of the Woodrow Wilson International Center for Scholars. He served for two decades in the State Department as a senior Mideast policy adviser.

Obama began his peace mission by boldly insisting that the new Israeli government of Prime Minister Benjamin Netanyahu cease building Jewish settlements in the West Bank and East Jerusalem, land the Palestinians envision as their future state.
"There is a clear understanding that we have to make progress on settlements, that settlements have to be stopped in order for us to move forward," Obama said during his first White House meeting with Netanyahu.

He was referring to a resumption of Israeli-Palestinian talks that began in November 2007 under former President George W. Bush but were broken off in December 2008 with Israel's shattering attack on the Gaza Strip.

Israel said it wanted, once and for all, to end Hamas rocket attacks from the enclave into southern Israel. Hamas, like key sponsor Iran, calls for Israel's destruction. The organization seized control of Gaza from the more moderate Fatah organization of Mahmoud Abbas, whose power now is restricted to the West Bank.

Abbas knows Obama is sympathetic to his cause. But he has refused to give ground on ending settlements even as Netanyahu moderated, going from outright refusal to an offer of a 10-month freeze. Secretary of State Hillary Rodham Clinton hailed that but Arabs were enraged.

"The Obama administration put Abbas in an unprecedented position, which boxed him in," said David Makovsky of the Washington Institute for Near East Policy. By backing his demand on settlements, Obama forced the Palestinian leader "up a ladder" with no way to "climb down."

Regardless, former Sen. George Mitchell, Obama's special Mideast envoy, returned to Israel shortly after the president acknowledged having underestimated the task of Mideast peacemaking.

"This is just really hard," Obama told Time. "Even for a guy like George Mitchell who helped bring about the peace in Northern Ireland. This is as intractable a problem as you get."

To wit: Mitchell's return last week was greeted by Netanyahu's claim that two Jewish settlements in the West Bank near Jerusalem would be part of Israel forever. That, after issuing a demand that Israel keep troops along the West Bank border with Jordan even after the Palestinians - should it ever happen - gain statehood.

That would seem to have killed off a return to talks any time soon. Mitchell had boldly said early on that he hoped to organize a peace deal, including a Palestinian state, within two years.

Miller warned against despair in Washington despite an absence of major progress after a year of trying.

"That would lead to disaster," he said. "Obama must continue with some variant of Mitchell staying on case. He should cut the rhetoric and keep pushing more quietly to see what he can produce."

Obama appears to agree.

"Moving forward, though, we are going to continue to work with both parties to recognize what I think is ultimately their deep-seated interest," he told Time.

A real step down from the high-flown hopes of a year ago.