Peretz's first remarks indicated he was moving to the left. He called to dismantle the settlement enterprise, to "return to Oslo" and reach a quick final-status deal with the Palestinian Authority. Focusing on social and economic issues, where he feels more at home, Peretz vowed to reject Israel's bipartisan adoption of free-market and privatization policies, which it has followed for 15 years. His goals are to reconstruct the welfare state, raise the minimum wage and support the poor. Speaking before his party's central committee, on Sunday, he softened his peace message, vowing to keep "united Jerusalem" and to resist the return of Palestinian refugees to Israel. But he continued to slam Sharon's economic policies. "We may forgive Sharon for the Lebanon war, but not for poverty," he read from his prepared remarks. At the same time, he also tried to calm the business community, which is worried about his "socialist" policies.

A centralist and dominant boss in the trade union movement, Peretz lacks any experience in matters of war and peace. This is a significant political weakness in a country where politics revolve over terror attacks and undefined borders, although it may bring some fresh thinking to a governing elite that was shaped on the front lines. Sharon's advantage, like Yitzhak Rabin's, lies in his unmatched record as a war hero. His attackers from the right have tried but failed to portray Sharon as a softie who rewarded Palestinian terrorists by removing settlements.

As prime minister, Sharon proved himself time and again to be a calm and brave leader in times of crisis, when the country faced daily suicide bombings, and through the painful process of disengagement. During the evacuation of the Gaza settlements, Sharon also displayed exemplary leadership. Thanks to meticulous preparation, the complicated operation was completed in six days, without a single gunshot. The scary scenarios of large-scale violence and a rift within the military never came to pass. Despite that, Sharon is not immune from weaknesses, most prominently corruption charges. His son Omri, a Knesset member who ran his father's campaigns, was convicted last week -- as part of a plea bargain -- for campaign finance violations during the 1999 Likud primary. Many Israelis view this as the son sacrificing himself for his dad, who walked away claiming "he didn't know."

Sharon's new leadership bid is focused on maintaining the momentum of disengagement, but from a "centrist" viewpoint: moving forward "responsibly," neither rushing to embrace the Palestinians, like the left, nor saying no to territorial compromise like the remaining, post-Sharon Likud. In specific terms, this means another West Bank withdrawal and removal of some settlements, by agreement with the Palestinians or (despite Sharon's denials) through another unilateral move. Israel's military planners, who assessed the options, have recommended another one-sided move, citing the weakness of the Palestinian Authority and Israel's ability to shape the future border according to its own interests. Sharon, however, is publicly committed to the unfulfilled "road map" plan for Palestinian statehood. He loves its demand for a Palestinian crackdown on terror before any Israeli move. But judging by his past actions, he may change his mind and act unilaterally, citing the "national interest."

How far would he go? Sharon is committed to keeping the main "settlement blocs," where most settlers live, as part of Israel, surrounded by the security barrier now under construction. He has pledged to remove other settlements, but has refrained from presenting a map. Many believe that the barrier route is his final, de facto eastern border of Israel. While the Palestinians reject this plan as an illegal confiscation of their land (about 10 percent of the West Bank land is on the "Israeli," western side of the fence), convincing the Israeli right to give up even this much of the West Bank will be extremely difficult. Withdrawing to the fence line will mandate the evacuation and resettlement of some 60,000 people, including the ideological core of the settler movement. Olmert, Sharon's sidekick, argues for it openly. This is no small endeavor, and Sharon's campaign will argue that he is the only leader capable of conducting it, given his proven record in the Gaza pullout, and his great relations with the Bush administration. American support is necessary for such a move, as Israel would need Washington's consent to keep the settlement blocs inside the fence.

Peretz is trying to outflank Sharon from the left, proposing to lease the settlement blocs from a future Palestinian state following a full Israeli withdrawal from the West Bank (with the exception of East Jerusalem and its holy sites). From the right, the leading figures in the Likud primary contest oppose such a withdrawal, conditioning every move with tough demands from the Palestinians.

The road map calls for Israel to withdraw from the occupied territories if the Palestinians take steps to stop militants. It also calls for Israel not to take steps that would prejudge final-status issues, in particular concerning Jerusalem and the borders of a future Palestinian state. Sharon, with President Bush's tacit acceptance, has largely ignored these restrictions, continuing to build settlements in the West Bank and vowing that the six largest settlements, including key built-up areas around Jerusalem, will remain part of Israel "forever." (New construction has been restricted to these areas, while halted in the dozens of isolated settlements.) Bush signaled his acceptance of Sharon's policies in a letter on April 14, 2004, in which he said that "realities on the ground" meant that Israel should be able to keep some settlements. This speech represented a historic shift in U.S. policy toward the Israeli settlements, which are considered illegal under the Fourth Geneva Convention (with Israeli legal dissent). Since then the Bush administration has expressed concern to Israel about construction that threatens to cut off Jerusalem from the West Bank, but has largely given Sharon a free hand in the "settlement blocs" he aims to "keep as part of Israel, connected territorially to Israel," according to his Monday press conference.

Israel is also enjoying an enviable strategic situation, with relative freedom of action, mainly as a result of Bush's aggressive policy in the Middle East. Its rivals, Iran and Syria, are facing international pressure to change their behavior (although the oil-abundant Iran is far less vulnerable to such pressure than Syria). Iraq is under American occupation, and Saudi Arabia and Egypt have been called to reform and liberalize their regimes. The Palestinians are still devastated by the death of their longtime leader Yasser Arafat last year. Their cause lost some of its global prominence and attention, as Mahmoud Abbas (Abu Mazen), the new P.A. leader, lacks his former mentor's charisma. Sharon is treating him as a useless weakling, while Hamas, the Islamic militant group, is gaining strength. Israel's Gaza withdrawal has weakened Abbas even more, as he failed to show control in the "liberated" areas. Now he wants to postpone legislative elections, originally planned for late January, for fear of losing ground to Hamas.

Bush and Sharon see eye to eye on almost everything involving the Palestinians, but their interests are not identical. Unlike Sharon, Bush views Abbas as a genuine reformer, committed to peace and democracy, and has so far rejected Sharon's efforts to sideline him. Moreover, American Mideast policy is often judged in European and Arab capitals by its willingness to pressure Israel on the settlements, the barrier and other contentious behaviors in the West Bank. This is where possible tensions between Sharon and Bush could arise, which Peretz will try to exploit. Last week, following a last-minute intervention by Secretary of State Condoleezza Rice, the Palestinians gained a first-ever crack in the Israeli siege around Gaza. Scheduled to open on Friday, the Rafah border crossing to Egypt will give the P.A. some control over its external border, although under the third-party supervision of European border officers and Israeli remote-controlled video cameras. This may be far from the Palestinian hopes, but nevertheless it is another important move in ending Israel's occupation.

In these circumstances, the coming Israeli government will probably determine the direction of events in the Palestinian-Israeli arena. The new timetable means that a decision on the next step in the West Bank may be made during 2006, rather than deferred to 2007. Much depends on the composition of Israel's next coalition, especially given the new tripartite structure, which all but leaves out the possibility of a dominant party. Stable parliamentary support is a necessity for a follow-up to the Gaza pullout. International involvement is no less important, in order to keep the process going. Bush's domestic problems cast doubt on his ability to be involved, but Washington remains committed, as shown by Rice's recent visit. This is a good sign, but more will be needed in the coming months.

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