They wear their wounds well, the buildings of the old "green line". Forget the new Jerusalem hotels across the road, the state-of-the-art tramway that glistens down the highway; just take a look at the bullet holes on the walls to the left, the shell gashes in the preserved façade of what was once an Israeli army bunker and is now Raphie Etgar's little art gallery.

You can still peer between the rusting iron shutters, across the road. A hundred metres away was the Arab Legion. Just 300ft from here was the Jordanian frontier.

For this is the 1967 "border" to which Mahmoud Abbas insists the Israelis must retreat, the "frontier" which Bibi Netanyahu regards as too "vulnerable" to return to in any peace treaty. Allow an Arab army back to the land over the road and Jerusalem is again divided, no longer the "united and eternal capital" of Israel. Allow the Israelis to maintain their illegal annexation of this same land and East Jerusalem can never be the "capital" of Palestine. The quotation marks are essential; as in "peace".

The art inside the "Museum of the Seam" – "seam" is a kind of substitute word for the "border" which Israel will not acknowledge, rather like "settlement" is a necessary substitute for "colony" – is about war and peace, about Baghdad and 9/11, about suicide bombers, a weird and highly effective collage of arms and legs, plastic and neatly severed, even an AK-47 rifle, and a Charlie Chaplin factory of cogwheels of Islamic calligraphy.

And somehow it's not surprising to find its art director and chief curator perched on the roof, a small, plumpish man in tiny, thick-framed spectacles who breathes heavily as he speaks unstoppably about the subjects which seem nearest to his heart: art, missed opportunities, hope and potential despair, mixed in with some stubborness. Raphie Etgar was a former tank commander, fought in two wars – in 1967 in Sinai, in 1973 in Golan – and in the bloody battle of Karameh (of which, perhaps, the less said the better) and "saw death very close to my eyes and lost quite a few of my friends".

But hark to his thoughts on war and peace. "The fact that our museum is located on the 'green line seam' is significant, no doubt – but it's more a conceptual 'seam'. It's not an accident that we are located here, but we mean to pass on some message. We prefer to keep the 'seam' in a wider context. In the exhibition, we deal with the clash of civilisations – I would expect visitors to see this in the context of East and West."

I'm not at all sure that the 1967 border, just outside the window behind Raphie Etgar, does contain lessons about the world. Europe is not claiming all of London or Paris for itself. Israel surely is claiming Jerusalem for itself. But it turns out that the ex-tank commander believes that we Europeans share these cities with our Muslim immigrants without handing over our capitals to them.

It's hard to place this man. Leftist definitively. Moral, absolutely. Haaretz reader, I suspect. He certainly bears no love for his Prime Minister after last week's speeches at the UN on Palestinian statehood. "I was sitting in front of the television and tried to hear two leaders speak a little bit less 'from above'. Netanyahu was the best actor. He knows how to give his show and unless you know that he is always playing this game, you would be tempted to believe what he says. He is the best acrobat in the Middle East.

"Then came the Palestinian President, who didn't leave me an inch of hope that he would open the door and not repeat his accusations. Here we were with a chance, where people could sit together and try to find something new. But it was just a repetition of the same old game, Netanyahu with his gimmicks and his playful voice. I could believe in a Shakespeare play more than I could believe in these lectures."

I ask which Shakespearean character Netanyahu would play – he thinks Brutus, I suggest King Lear but forbear to suggest that a lot of the Likud leadership treat the Palestinians as Calibans. "It seems there is a lot of tiredness which brought many people in this region to give up their hope," Etgar says. "So strength comes instead of hope."

His point – so far as I can project it – is that Israel should prepare to share its land when it is strongest, not delay until it has less "strength". There are "rules of negotiation" – other people should be treated with respect.

So would Etgar allow the Palestinians to have a capital in east Jerusalem, Israel's in the west of the city? There is no hesitation now. "If I was in charge," he suddenly says, "I would not share Jerusalem – I would not. I think the Palestinians are touching a very, very sensitive point here.

"They should get 'Palestine' as a country, as a place for living. Give them the West Bank – but remember a few things that are also very sensitive and basic and meaningful to the Jewish nation. They should recognise the Jewish identity of this land [Israel]. I don't think they would do less well if they ran the whole business from Ramallah."

I'm aware that somewhere in our conversation, we've slipped over a precipice. Etgar talks about sharing "a sense of human rights" but Jerusalem has too many "bleeding stones". The Palestinians and Arabs might have to accept a Muslim-Arab "quarter" in east Jerusalem. "There are many cities with 'quarters'. But to come out with a declaration that 'this is going to be the capital of Palestine'! The history of my own family demands this. You won't be able to take it from the bones of all those buried in this place."

I climb to the watchtower on the roof where I can see Mount Scopus and the Mount of Olives. It might once have been a good idea to go back to the "green line", Raphie Etgar had said before I left him. "But things were changed by time."

Ah, history – always to blame, always lying like a rug over Jerusalem. I tried to close the old iron shutters on the stairwell. But they had been congealed into the wall in the years since 1967.