Q+A: U.S. faces risky choices in Israel fracas

WASHINGTON (Reuters) - The dispute rocking U.S.-Israel relations leaves the Obama administration facing a menu of risky choices as it assesses the next phase of its troubled Mideast peacemaking effort.

The United States has reacted with rare public outrage to Israel's announcement of plans to build 1,600 housing units in East Jerusalem, a move which threatened to torpedo U.S.-led efforts to relaunch Israel-Palestinian peace talks halted for more than a year.

The Palestinians, who had agreed to indirect negotiations, have demanded a stop to the settlement plan before any talks can commence.

What Israel does next, and how the United States responds, could determine whether talks resume and how Washington's relations with its key Mideast ally develop in coming months.

WHY IS UNITED STATES SO ANGRY?

Israel's announcement came during a visit by U.S. Vice President Joe Biden, who was on a mission to build support for the peace process which Palestinian President Mahmoud Abbas only recently agreed to rejoin.

The issue of Israeli settlements, which it has been building since the 1980s on the West Bank and on land occupied by the Israeli military since 1967, is deeply emotive for both Israelis and Palestinians, many of whom see the future of the communities as important to their respective sovereignties.

Biden condemned the move, and senior U.S. officials including Secretary of State Hillary Clinton later ramped up the rhetoric further, calling it "insulting" and a bad signal for the U.S.-Israel relationship.

The United States has demanded that Israel take unspecified action to reaffirm its commitment to the peace process.

Political analysts say the U.S. response reflects deep frustration over halting steps toward new Mideast talks, a key U.S. goal that is tied to more acute challenges including wars in Afghanistan and Iraq, the stand-off over Iran's nuclear program and U.S. efforts to improve relations with the Muslim world.

"Negotiations between Israelis and Palestinians don't necessarily directly help those efforts. But the lack of Israeli-Palestinian talks makes it more difficult," said Haim Malka, deputy director of the Middle East Program at the Center for Strategic and International Studies think tank.

WILL THE TOUGH U.S. LINE PAY OFF?

Despite the furor over the settlement announcement, U.S. officials emphasize that U.S.-Israel ties remain strong, with Clinton hailing the "unshakable bond" between the countries.

Political analysts say the row could foreshadow stronger U.S. pressure on Israel to make concessions to bring the Palestinians back to the table -- concessions that Netanyahu, facing his own political calculations at home, may not be able to afford.

"The decisive thing is whether or not Netanyahu and Obama share a basic understanding of where they are going," said Stephen Cohen, president of the Institute for Middle East Peace and Development. "There hasn't been a clear indication that that is where we are."

Palestinian and other Arab leaders are likely to revel in a tougher U.S. stance on Israel, and may adopt a wait-and-see attitude in expectation of more Israeli concessions.

But if U.S.-Israeli ties grow too strained and U.S. influence over Israeli leaders weakens, the Palestinians could see the peace process lose its most powerful proponent.

WHAT ARE THE RISKS FOR THE UNITED STATES?

The Obama administration faces its own risks in taking a harder line on Israel, which since its founding in 1948 has enjoyed strong U.S. backing.

Obama's Democratic party is facing tough mid-term elections this year, and Republicans have seized on the Israel issue as an indication that Obama is weak on basic security issues.

"You don't sit here and slam our ally and then want to go and have patience and talk to Iran," said Rep. Eric Cantor, the second-ranking Republican in the House of Representatives.

Alienating pro-Israel groups, which have made clear their unhappiness at the criticism of Israel, could hurt the Obama administration politically.

Internationally, the United States may also be raising unrealistic expectations over what it is prepared to do to get Mideast peace talks started again.

At a Moscow meeting this week of the "Quartet" of Mideast peace negotiators -- the United States, the European Union, the United Nations and Russia -- U.S. officials are likely to come under pressure to show that the U.S. strategy is working.

Cohen, a long-time analyst of U.S. Mideast policy, said that friend and foe alike would be watching carefully to see if Washington is willing and able to manage the situation -- with potentially far-reaching repercussions.

"If they come to think that the United States is shirking its responsibility on the Israel-Palestinian question, they will not have a lot of confidence about the United States' design of the strategy on Iran either," he said.

(Editing by Eric Walsh)