The Bush administration is again committing a blunder in the Middle East by supporting the Israeli government in its refusal to recognise a Palestinian unity government that includes Hamas. This precludes any progress towards a peace settlement at a time when such progress could help avert conflagration in the greater Middle East.

The US and Israel seek to deal only with Mahmoud Abbas, Palestinian Authority president. They hope new elections would deny Hamas the majority it has in the Palestinian legislative council. This is a hopeless strategy, because Hamas would boycott early elections and, even if their outcome resulted in Hamas’s exclusion from the government, no peace agreement would hold without Hamas support.

Meanwhile, Saudi Arabia is pursing a different path. In a February summit in Mecca between Mr Abbas and the Hamas leader Khaled Mashaal, the Saudi government worked out an agreement between Hamas and Fatah, which have been clashing violently, to form a national unity government. Hamas agreed “to respect international resolutions and the agreements [with Israel] signed by the Palestinian Liberation Organisation”, including the Oslo accords. The Saudis view this accord as the prelude to the offer of a peace settlement with Israel, to be guaranteed by Saudi Arabia and other Arab countries. But no progress is possible as long as the Bush administration and Ehud Olmert’s Israeli government refuse to recognise a unity government that includes Hamas.

Many causes of the current impasse go back to the decision by Ariel Sharon, former Israeli prime minister, to withdraw from the Gaza Strip unilaterally, without negotiating with the then Fatah-controlled Palestinian Authority. This contributed to Hamas’s electoral victory. Then Israel, with strong US backing, refused to recognise the democratically elected Hamas government and withheld payment of the millions in taxes collected by the Israelis on its behalf. This caused economic hardship and undermined the government’s ability to function. But it did not reduce support for Hamas among Palestinians and it reinforced the position of Islamic and other extremists who oppose negotiations with Israel. The situation deteriorated to the point where Palestine no longer had an authority with which Israel could negotiate.

This is a blunder, because Hamas is not monolithic. Its inner structure is little known to outsiders but, according to some reports, it has a military wing, largely directed from Damascus and beholden to its Syrian and Iranian sponsors, and a political wing that is more responsive to the needs of the Palestinian population that elected it. If Israel had accepted the results of the election, that might have strengthened the more moderate political wing. Unfortunately, the ideology of the “war on terror” does not permit such subtle distinctions. Nevertheless, subsequent events provided some grounds for believing that Hamas has been divided between its different tendencies.

No sooner had Hamas agreed to enter into a government of national unity than the military wing engineered the kidnapping of an Israeli soldier, which prevented such a government from being formed by provoking a heavy-handed Israeli military response. Hizbollah used the opportunity to stage an incursion from Lebanon, kidnapping more Israeli soldiers. Despite a disproportionate response by Israel, Hizbollah stood its ground, gaining the admiration of the Arab masses, whether Sunni or Shia. It was this dangerous state of affairs – including the breakdown of government in Palestine and fighting between Fatah and Hamas – that prompted the Saudi initiative.

Defenders of the current policy argue that Israel cannot afford to negotiate from a position of weakness. But Israel’s position is unlikely to improve as long as it pursues its current course. Military escalation – not just an eye for an eye but roughly 10 Palestinian lives for every Israeli one – has reached its limit. After the Israeli Defence Force’s retaliation against Lebanon’s road system, airport and other infrastructure one must wonder what could be the next step. Iran poses a more potent danger to Israel than either Hamas or Hizbollah, which are Iran’s clients. There is growing danger of a regional conflagration in which Israel and the US could be on the losing side. With Hizbollah’s ability to withstand the Israeli onslaught and the rise of Iran as a prospective nuclear power, Israel’s existence is more seriously endangered than at any time since its birth.

Both Israel and the US seem frozen in their unwillingness to negotiate with a Palestinian Authority that includes Hamas. The sticking-point is Hamas’s unwillingness to recognise the existence of Israel, but that could be made a condition for an eventual settlement rather than a precondition for negotiations. Demonstrating military superiority is not sufficient as a policy for dealing with the Palestinian problem. There is now the chance of a political solution with Hamas brought on board by Saudi Arabia. It would be tragic to miss out on that prospect because the Bush administration is mired in the ideology of the war on terror.