On the Israeli sideIsrael has internal issues that inadvertently affect how the Mideast conflict will turn out. It was former Prime Minister Ariel Sharon who took two key actions to overcome what he saw as stalling in the peace process: first, he left his Likud party to form a centrist Kadima party. Prominent Israelis who followed him were current President Shimon Peres, Foreign Minister Tzipi Livni, and current Prime Minister Ehud Olmert, who took over after Sharon suffered a crippling stroke in January 2006.
Second, he orchestrated the 2005 Israeli pullout from the Gaza Strip. At the time, Sharon's finance minister, former Prime Minister Benjamin Netanyahu, resigned in protest, but increasing numbers of Israelis have questioned the success of the withdrawal in the years since -- particularly as the Palestinian unity government has split and Hamas rules over a largely lawless Strip from which attacks continue to be launched against Israel. This security situation has put Netanyahu's Likud party in a better position for future potential legislative gains, but the performance of Olmert is also likely to help Likud's future.
Olmert has been involved in various financial scandals during his term, but public opinion largely turned against him after the bungled 2006 war with Hezbollah in Lebanon. Not only did the U.N. ceasefire leave Hezbollah with bragging rights (and U.S. Ambassador to the U.N. Zalmay Khalilzad says Hezbollah has been rearming in violation of Security Council resolution 1701), but the Israeli soldiers captured at that time on the Lebanon border and near the Gaza Strip -- seizures that largely sparked the battle -- remain missing.
Even Livni has called Olmert's leadership into question, and it remains to be seen how long he'll remain in office -- or how his eventual successor will deal with the Palestinian issue.
On the Palestinian sideThe greatest hurdle for the Palestinians to overcome is internal disunity. While the current leaders share similar ambitions of a Palestinian state, that's where the similarities tend to stop.
President Mahmoud Abbas, of the Fatah party, favors a two-state solution and has met often with Israeli leaders to discuss the peace process. But Hamas' win in the 2006 parliamentary elections created another hurdle: Hamas is considered a terrorist organization by the United States, Canada, and Japan, and the European Union labels Hamas as being involved in terrorist attacks. Hamas has refused to budge on some key issues that would get the peace process moving: they refuse to recognize the state of Israel, and refuse to renounce violence against the Jewish state.
In 2007, battles between Hamas and Fatah grew increasingly nasty; Human Rights Watch accused both Fatah and Hamas of "war crimes" after incidents including Abbas' cook being thrown off a 15-story building in Gaza. After this split, Hamas Prime Minister Ismail Haniyeh was replaced with Salam Fayyad on the basis of a "national emergency." Haniyeh has refused to accept the dismissal.
That year, Hamas took control of Gaza, leaving the Palestinian Authority in charge of only the West Bank. Hamas continues to be controlled by hardliner Khaled Mashal from his offices in Damascus, Syria; he tries to get concrete political and financial support from others in the Arab world, including King Abdullah of Saudi Arabia, who has come through both on the P.R. front and in the pocketbook.
Still, Gaza under Hamas reached such dire financial straits because of the Israeli blockade (enacted because of constant rocket fire into Israel from Gaza) that Palestinians tore down the border fence with Egypt in January 2008 and poured across to buy food and other supplies. The situation has strained relations with Egypt, which plans to build a tougher border wall with more guardposts.