Seasoned observers of Israel’s alliance with the United States regarded Benjamin Netanyahu’s meeting with Barack Obama at the White House on May 18 as a pivotal moment.

Speculation had abounded that Israel’s new prime minister, given his reluctance to endorse a two-state solution to resolve Israel’s conflict with the Palestinians, would clash with the newly elected president of the United States and thereby damage Israel’s single most important bilateral relationship.

On the eve of Netanyahu’s much-anticipated visit, Washington made it abundantly clear that a two-state solution – which previous Israeli governments have endorsed and worked for in various degrees of seriousness – was central to Obama’s Middle East policy. Obama and his vice-president, Joe Biden, promoted the internationally embraced concept, while urging Israel to stop building or expanding settlements in the West Bank, dismantle unauthorized outposts and allow Palestinians freedom of movement.

As if to underline the point, George Mitchell, Obama’s Mideast envoy, declared that a two-state solution was in Israel’s national interest and really the only way to defuse its long-running dispute with the Palestinians. “The U.S. is committed to the establishment of a sovereign, independent Palestinian state, where the aspirations of the Palestinian people to control their own destiny are realized,” said Mitchell during one of his three trips to the region in recent months.

With Netanyahu’s appearance in Washington drawing ever closer, the United States applied none-too-subtle pressure on Israel. Susan Rice, the American ambassador to the United Nations, voted for a Security Council resolution calling for “urgent action” to achieve a two-state settlement. In addition, Rice reminded Israel that the Obama administration was not keen on a “lengthy, drawn-out process” to reach that objective. Meanwhile, Jim Jones, Obama’s national security adviser, pointedly observed that there was “an expectation” in world capitals that peace in the Middle East should be vigorously pursued.

Yet as it clearly enunciated the need for Palestinian statehood, the United States described its bonds with Israel as “unshakable as ever,” expressed support for Israel’s security, opposed calls for the right of Palestinian refugees to return to their former homes in what is now Israel, condemned Palestinian violence, pledged to boycott Hamas unless it recognizes Israel and renounces terrorism, and promised to maintain Israel’s qualitative military edge over the Arabs. And in further deference to Israel, Washington boycotted the second UN anti-racism conference, held last month in Geneva. At the same time, the Obama administration voiced its commitment to the 2003 “road map” peace plan, which remains a dead letter to this day.

The Palestinian question, however, was not the only issue on the table. Iran also loomed large.

The Islamic fundamentalist regime in Tehran is a clear and present problem – for Israel, the United States and moderate Arab governments – because of its ardent desire to acquire a nuclear weapons arsenal and to expand its influence in the Middle East, particularly in the Gaza Strip and Lebanon.

Obama and his advisers believe that a resolution of Palestinian grievances, resulting in full-fledged statehood, will better enable the United States to engage Iran in talks designed to halt its nuclear program once and for all and blunt its clout in the region.

By contrast, Netanyahu is of the view that if the Iranian thorn is removed by diplomacy, economic sanctions or military means, negotiations with the Palestinians will then have a better chance of succeeding.

Since becoming prime minister again, Netanyahu has called for a “fresh approach” to peace with the Palestinians, suggesting that talks should be resumed without delay or preconditions, and that they should be pursued on political, security and economic tracks. And while Netanyahu claims that Israel does not wish to govern the Palestinians, he has adamantly refused to explicitly support a two-state solution, sowing suspicion that his real agenda is to scuttle the peace process and leave Israel with a hefty slice of the West Bank in its hands.

Netanyahu’s foreign minister, Avigdor Lieberman, has fanned such fears. He has stated that Israel is not bound by the Annapolis process, which Netanyahu’s predecessor, Ehud Olmert, embraced and attempted to flesh out in talks with the Palestinians. And he has derisively compared Israeli-Palestinian negotiations to a cottage industry.

Due to all these factors, Israeli and American commentators feared that a confrontation with the United States was in the offing and that Netanyahu and Obama would not reach an understanding befitting allies.

Recalling Netanyahu’s sometimes rocky relations with Bill Clinton, a former U.S. president, Aaron David Miller, a senior official in Clinton’s Mideast peace team, noted that the United States was deeply frustrated with Netanyahu’s “erratic and often obstinate policies, in particular on settlements.”

But as he prepared for his momentous encounter with Obama, Netanyahu played down any notion of friction with the United States, noting that Washington and Jerusalem share mutual interests and values, and that ties between them are strong.

In fact, a confrontation did not occur, with both Netanyahu and Lieberman portraying the meeting in rather positive tones. According to Netanyahu, Israel and the United States reached understandings on two vital issues: Israel would soon launch talks with the Palestinians, and Iran’s nuclear program had to be stopped.

But Despite Netanyahu’s spin, substantial differences surfaced.

At their meeting, which lasted an hour longer than planned, Netanyahu reiterated his interest in resuming talks with the Palestinians immediately, but only if they recognize Israel as a Jewish state. In this vein, he said that Israel wants “to live in peace” with the Palestinians, yet he declined to support a two-state solution. After the meeting, one of Netanyahu’s advisers said that the focus on a two-state solution was “childish and stupid.” This will not be taken lightly in Washington.

For his part, Obama pressed Netanyahu to freeze the construction of settlements in the West Bank. As he put it, “Settlements have to be stopped in order for us to move forward.” Prior to Netanyahu’s departure for the United States, Israel issued tenders to expand Maskiot, a settlement in the West Bank. But in the wake of Netanyahu’s meeting with Obama, Defence Minister Ehud Barak announced that unauthorized outposts, as opposed to regular settlements, would be removed, by force if necessary. And in a further nod to Obama, Israel evacuated Moaz, one of the many unauthorized outposts that Israel has promised, but failed, to dismantle.

As for Iran, Obama said that he had no intention of conducting talks with Iran indefinitely on ending its program of uranium enrichment. Washington is truly concerned by Iran’s nuclear program. Last week, U.S. Secretary of State Hillary Clinton described it as an “extraordinary threat.” Israel is probably satisfied with U.S. policy on this score, having said that U.S.-Iranian discussions should be subjected to a strict deadline. Before flying to Washington, Netanyahu promised the Obama administration that Israel would not attack Iran without notifying the United States.

The Netanyahu-Obama meeting notwithstanding, it is still far from clear whether Israel and the United States are heading for a bruising test of wills. The situation will be much clearer in June, when Obama is scheduled to deliver a major speech in Cairo on the Middle East. Until then, Netanyahu will have to hold his breath.