How far away is a Middle East peace deal? It could be as little as 13 miles

With Jewish settlements the biggest barrier to any agreement, Catrina Stewart visits Ariel, deep inside the occupied West Bank

Unfurling a large map of the West Bank, Palestinian cartographer Khalil Tafakji picks out Ariel, a large Jewish settlement that lies deep in the occupied West Bank.

With his finger he traces an outline of Israel's vision for annexing this area that would, he says, effectively carve a Palestinian state into two halves.

A small town of 20,000 residents, Ariel is just a short drive from Tel Aviv and the Mediterranean coastline along a purpose-built highway. It boasts an impressive sports centre and a new theatre that is to open shortly, and its college was recently upgraded to a university.

And yet its proximity to Israel's most thriving metropolis is misleading: Ariel is some 13 miles inside the Green Line, as the 1967 borders of Israel are known, and its location could hinder the territorial contiguity of an independent and viable Palestinian state, presenting a grave challenge to the direct peace talks newly revived by Barack Obama.

The settlements, illegal under international law and never so numerous in the West Bank as they are now, have unexpectedly emerged as one of the most serious challenges to achieving an historic peace deal.

When an Israeli freeze on construction in West Bank Jewish settlements expires tomorrow, it will pave the way for an avalanche of new building by ideological settlers, who remain deeply opposed to the creation of a Palestinian state.

"This is a problem," says Mr Tafakji, pointing out on the map, how Israel only has to insert a well-placed checkpoint along Route 60, the West Bank's main north-south axis, to control movement. "If Israel were to annex this whole area, it would mean dividing the West Bank into two parts – north and south."

Ariel is regarded as part of Israel's so-called national consensus, a term that refers to the settlement blocs, encompassing many acres of unspoiled land, that are expected to remain in Israeli hands under a final peace deal. Unlike the other blocs, however, Ariel is situated many miles away from the Green Line.

Refer to Ariel as a settlement within earshot of its fiery mayor, Ron Nachman, and one will be given short shrift. "This is a city. I don't want it called a settlement," he says angrily. "Give me the [due] respect as mayor of the city."

Terminology is important. The residents of Ariel do not see themselves as settlers. Most of them are Russian immigrants, who moved here in search of affordable housing and good schools. "I live here because it's a nice city. It's good for children and it's good for housing," says Rueven Cohen, an Anglo Israeli who works in the mayor's office.

But Ariel received a rude awakening last month when some of Israel's most renowned writers, actors and directors pledged to boycott five theatre companies' performances in Ariel's new cultural centre. Israeli academics added their support to the boycott, saying they would not lecture at the university or indeed any other institution in occupied territory.

The boycott reignited the debate on the settlements, long seen as a cancer by left-wingers, but largely ignored by mainstream Israelis. For the first time, it appeared that Ariel might not be as much a part of the consensus as its supporters thought. As Mr Cohen admits, "it was an insight into how Ariel is seen by other Israelis".

Since Israel captured the West Bank in the Six-Day War of 1967, some 300,000 Israeli settlers have made their homes among the hilltops there. While economic factors are for many the primary consideration, a core of extremist settlers is fired by a religious zeal to reclaim biblical Israel.

Israel hinted at a compromise on construction yesterday, an 11th-hour concession to prevent the Palestinians from walking out of the talks if construction resumes on Sunday. The Palestinians have argued that Israel cannot negotiate for peace in good faith while entrenching its occupation of Palestinian territory.

"Israel is prepared to reach a compromise acceptable to all parties," an Israeli senior government official said in comments quoted by Agence France Press, but added "there cannot be zero construction" in the West Bank. Israel has previously suggested freezing projects outside of the major blocs.

Washington had hoped to convince Israel to extend the freeze by three months, giving the two sides a window in which to draw the borders of a future Palestinian state. But Israel has firmly rejected a plan that would put borders on the agenda before security.

The hint of compromise from the Israeli camp will come as a relief to US President Barack Obama, who has dominated the efforts to bring the two sides back to direct negotiations after a near-two-year break. But in his quest to achieve a framework agreement within a year, he risks serious damage to his political credibility should the talks break down at an early stage. In an impassioned appeal to the UN General Assembly this week, Mr Obama urged a cynical world to set aside doubts and help achieve an agreement that would end decades of bloodshed and occupation. Arguing that it was "now or never", he promised "this time it will be different".

Even as he spoke, though, settlers were preparing the bulldozers and cement trucks to start laying the foundations of a new settlement amid much pomp and ceremony. In Ariel, the mayor is looking to build 100 new houses almost immediately to house Israelis pulled out of Gaza during Israel's disengagement there five years ago.

The prospect of Israel repeating such an exercise in the West Bank is treated with derision and prophecies of a civil war that would tear the country in two. Under a peace deal, the 80,000 settlers living outside the consensus blocs would probably have to withdraw, although the implementation could take decades.

"To forcefully expel 80,000 in Judea and Samaria [the biblical term for the West Bank]... will break the backbone of Israeli society, I am convinced of that," says Dani Dayan, leader of the settlers' Yesha council, and a former lecturer at Ariel's college.

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