On its face, this seems to make sense. The US domestic and foreign-policy plate is overflowing, as the administration watches over and, hopefully, winds down two wars. There is a European debt crisis that could impede domestic economic recovery; a nuclear challenge from Iran that is escalating; another from North Korea that remains unresolved; a potential powder keg in Pakistan; and a challenge from China that has yet to be properly defined, never mind addressed.

On top of all this, the US must constantly guard against terrorist threats that are increasingly serious and global. Should the Israeli-Palestine issue then be mothballed again? This dispute is admittedly in a tiny piece of land in the Middle East.

Yet we cannot but notice that the conflict captures attention far beyond the region. Opposition to the Gaza blockade has the attention not only of every Arab and every militant Muslim in Iran, but also of most moderate Muslims in faraway places such as Indonesia, Malaysia, India and Nigeria. Turkey, once a sturdy friend of the West, now distances itself from the shrinking “international community.” And it is not, as US Defense Secretary Robert Gates has claimed, because of the European Union’s reluctance to admit Turkey. Even presumably less interested parties around the world, such as those in Europe and Latin America, attach importance to the character of Washington’s longstanding effort to fashion a solution to the conflict.

In nations that are Israel’s most stalwart allies, citizens scrutinize the policies and question Israel’s tactics like the Gaza blockade. Plans are under way for another flotilla to test the blockade this fall, including ships from the US, Europe, India, Canada, South Africa and the Middle East. In late July, the UN Rights Committee urged Israel to lift its military blockade of the Gaza Strip and allow an independent investigation of the May raid on the aid flotilla. Israel has since agreed to cooperate with the UN investigation.

What is at stake is not just the ability to help settle one of many international disputes, but the credibility of US President Barack Obama’s shift to greater evenhandedness in dealing with this dispute. Any indication that the administration will, after all, follow the path of least resistance and revert to its pro-Israel stance can be counted on to cost the US dearly in many current and future trouble spots around the world. Admittedly, Al-Qaeda’s methods or objectives are not affected either way. But any shift from evenhandedness could, for example, sway the Iranian opposition’s willingness to shift from a “down with the US” to a “down with the dictator.”

Some believe, along with apparently a majority of Israelis, that the Israeli-Palestinian conflict is not ripe for ambitious diplomacy and that the US should focus instead on repairing frayed ties with Israel while concentrating on Iran and its nuclear program. But when will the time ever be ripe? The parties have pursued the well-worn Oslo blueprint for almost two decades with arms’ length help from the US, without success. Time is not on the side of a two-state solution.

Before Israel’s May attack on the aid flotilla, there were signs of a possible rapprochement between Fatah and Hamas and even a willingness on Hamas’ part to consider recognition of Israel’s right to exist, along the lines of the Arab League’s peace proposal. If the Quartet – the United Nations, the EU, Russia and an indispensable US – were willing to face reality, it would have to recognize that achieving a two-state solution requires participation of Hamas as well as Fatah.

It is often conveniently forgotten that Hamas won the election in Gaza fair and square. The US has labeled Hamas a terrorist organization and refused to deal with it, but this was also true of the Stern Gang as well before Israel’s creation. It is relevant that Obama wisely pointed out, both during his presidential campaign and since, that the US must also talk to its enemies to make progress.

Bringing Hamas into negotiations, both intra-Palestinian and with Israel, will raise hackles in Israel, which already distrusts Obama, and in the US, where the evangelicals and the pro-Israel lobby strive to out-hawk Israeli me Minister Benjamin Netanyahu. It is hard to believe that it’s impossible to convince Israelis that a policy of relying on force is bound to be short-lived. Demography and the march of competitive technology militate against Israel over time, as is the fact that Egypt and Saudi Arabia, possibly Jordan as well, are bound to become more radicalized once the current leaders move on. Israel must realize that maintaining its current position can eventually only culminate in a slide toward an unacceptable one-state solution.

There are also signs that American Jews, if less so leadership voices in the community, while supportive of Israel, are ready to criticize policies they see as detrimental to Israel’s own long-term security. Peter Beinart in a recent New York Review of Books article pointed out that younger, non-orthodox Jews are currently less ready to find themselves in lockstep with a hard-right Israeli government.

General David Petraeus recently, also, pointed out that the US ability to win over moderates in the Muslim world was endangered by an inability to settle the Israeli-Palestinian conflict equitably. That Israel could become a liability for the US is no longer so farfetched.

It is time for tepid indirect talks between the principals to morph into direct talks. The Arab League has just given a green light to the Palestinians to do so. Even when a situation looks hopeless, tensions can ease, as in Northern Ireland. And a determined Quartet demarche, with the US in the lead, could be very helpful right now.

As unpleasant, even dangerous, as current events and finger-pointing may be, this Gaza cloud may have a silver lining – well beyond the short-term easing of Israel’s Gaza blockade. It should remind all parties that Hamas cannot be ignored, if the US is serious about working energetically toward a two-state solution before the possibility fully recedes from sight. The aftermath of the flotilla incident represents a crisis that would be exceedingly costly to waste.

**Gustav Ranis is the Frank Altschul Professor Emeritus of International Economics at Yale University. This article is reprinted with permission from YaleGlobal Online (www.yaleglobal.yale.edu). Copyright © 2010, Yale Center for the Study of Globalization, Yale University.