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Israeli Prime Minister Benjamin Netanyahu speaks during a graduation ceremony for Israeli air force pilots at the Hatzerim air base in southern Israel on Thursday.Amir Cohen/Reuters

Beyond all the name-calling and posturing, there is a simple truth in the diplomatic blowout between the United States and Israel this week: that is, Israel's relentless policy of expanding its settlements in Jerusalem and the West Bank may soon reach a tipping point that will make a two-state peace settlement with the Palestinians a practical impossibility.

For the far-right factions of Israel's government who have Prime Minister Benjamin Netanyahu in their thrall, and for their supporters in the U.S., this is clearly the desired outcome.

But for President Barack Obama, and for many of Israel's allies around the world, the loss of the two-state option would be a disaster, dooming Israelis to endless conflict and isolation.

The aggressive construction of new homes in the settlements so undermines the peace process that the U.S. chose, rather remarkably, not to veto a United Nations Security Council resolution condemning the practice last week. This was followed by a speech this week by Secretary of State John Kerry, in which he blasted the settlements. Mr. Netanyahu was infuriated, but it was the right move.

Without settlements, Israel's occupation of the West Bank is indefinite, but also temporary. Temporary can be a very long time, given the realities of the region.

But with ever-expanding settlements, Israel is making a declaration of permanence, in turn making a two-state peace deal, in some indefinite future, that much more unlikely, or even impossible.

That's why many Israelis, along with the outgoing U.S. administration, oppose the settlements. They know any annexation of the West Bank will never be accepted by the international community.

So if the U.S. criticizes Israel on this issue, it is doing it a favour.

Mr. Obama has nothing to apologize for in terms of his support of Israel – he signed a 10-year, $38-billion (U.S.) military aid package for the country only three months ago. What he wants, though, is a secure and prosperous Israel to live side by side with a Palestinian state equally blessed.

That's a long way off, given the haplessness of the Palestinian Authority in the West Bank and Hamas's terrorist stronghold in the Gaza Strip.

But the failings of the Palestinians do not preclude a peaceful settlement. They only make it difficult to reach. Mr. Netanyahu seeks to make the difficult impossible with his constant expansion of settlements. If he succeeds, he will bring disaster to his country and further inflame the region.

Note to readers: This editorial has been updated to reflect the following correction: A Friday editorial incorrectly referred to Israel's policy of building new settlements in Jerusalem and the West Bank. In fact, it is building hundreds of new housing starts within the settlements.

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