Since 2003, we have been told repeatedly that the principles of the "two-state solution" envisaged in the so-called road map will lead to a peaceful settlement in the Middle East; and since Barack Obama was inaugurated as US president ten months ago, we have been told that he is preparing to put them into practice. Yet far from leading to the fulfilment of the "two-state solution", Obama's presidency seems more likely to lead to its demise. The committee that awarded Obama the Nobel Peace Prize cited his "extraordinary efforts to strengthen international diplomacy and co-operation between peoples", but his attempts to force the Israelis and Palestinians into meaningful negotiations have only revealed the differences between them, and how empty the concept of the two-state solution has become.

On 4 November, the chief Palestinian negotiator, Saeb Erekat, said what is supposedly the unsayable - that unless settlement expansion stops, Palestinians may have to abandon the goal of an independent state. Even the compliant Mahmoud Abbas, president of the Palestinian Authority, was forced to acknowledge that the Israelis had put him in an impossible position: already gravely weakened by his hastily retracted decision to help defer a vote at the UN on the Goldstone report on human rights abuses during Israel's offensive in Gaza last December and January, he admitted that he can no longer justify his conciliatory stance as a means of winning concessions. He has since announced he will not stand for office in elections to be held in the Palestinian territories in January.

Yet the deadlock had been apparent for some time. The speech made by Israel's prime minister, Binyamin Netanyahu, on 14 June, in which he endorsed for the first time the notion of a Palestinian state alongside Israel, was reported as a "historic" breakthrough, but it fell far short of acknowledging Israel's internationally recognised obligations. The demilitarised entity that he envisaged in the West Bank barely merited being called a "state". Meanwhile, Hamas has attached similarly sweeping provisos to the idea of establishing a state within pre-1967 borders. "Hamas struggles for an end to occupation and for the restoration of our people's rights, including their right to return home," Khaled Meshal, the Hamas leader, said in an interview in the New Statesman two months ago.

There are now more than four million descendants of the Palestinians made homeless refugees by the Arab-Israeli war of 1948-49. Some would say their right to return is symbolic, others that it is a matter of personal conscience which no politician can barter away. Yet, given that its implementation in even a partial way would mean the end of Israel in its current form, insisting on such a condition is nothing more than a restatement of the cause of the original conflict. As Hussein Agha and Robert Malley put it in the New York Times earlier this year, "Acceptance of the two-state solution signals continuation of the Israeli-Palestinian struggle by other means".

Israel's determination to resist meaningful compromises is apparent in the way it confronted the Obama administration over the "natural growth" of settlements. Israel maintains that people who are born in a settlement in the occupied territories should be allowed to live there when they grow up, and that the settlements should be allowed to expand "naturally" to accommodate them. It is an absurd argument: research suggests that "natural growth" includes significant numbers of incomers with no previous connections to the settlements. And besides, it does not address the existence of the settlements themselves. Yet it has served Israel's purpose: "It has provided a smokescreen behind which Israel can pursue more significant and urgent construction that, when completed, will truly render the occupation irreversible," says Jeff Halper of the Israeli Committee Against House Demolitions.

The Jerusalem Light Rail, or JLR, is a case in point. The construction of Line 1, which is intended to run from the settlement-suburb of Pisgat Ze'ev in the north-east of the city to Mount Herzl in the west, is three years behind schedule, but in the past month or so the tracks have begun to climb the hill past the medieval walls of the Old City of Jerusalem. What used to be a four-lane road has been reduced to two, with inevitable effects.

One Sunday evening last month, I took a taxi back to my hotel in east Jerusalem. When we reached the north-west corner of the Old City, my driver gestured at the cars queuing down the hill towards Damascus Gate, just beyond the commonly accepted divide with the Palestinian quarters. He believed the JLR would not persuade drivers to leave their cars at home - in the long run, he said, it would generate more congestion and pollution. Others believe it will have even more profound implications for Jerusalem's future: the scheme's planners say it is intended to fulfil the vision of the father of modern Zionism, Theodore Herzl, of a city with "modern neighbourhoods with electric lines" and "tree-lined boulevards", but critics say it will fulfil another element of Herzl's Eurocentric vision. "The true objective," says Omar Barghouti, a founding member of the Boycott, Divestment, Sanctions (BDS) movement against Israel, "is to entrench irreversibly the 'Judaisation' of Jerusalem, and perpetuate its current reality as a unified city with a predominantly Jewish population under Israeli control." The international community does not recognise Israel's annexation of east Jerusalem after the Six Day War of 1967, which means that settlements such as Pisgat Ze'ev are built on illegally occupied land, yet the JLR will bind them closer to the Jewish districts in the western half of Jerusalem, and make the task of partitioning the city even harder.

Other events in the summer, such as the eviction of Palestinian families from the Sheikh Jarrah neighbourhood, and a series of announcements about planned building projects, provide further evidence of Israel's intention to preclude meaningful negotiations about the city's future. In September, it said it was beginning work on 500 new apartments in Pisgat Ze'ev, and in August it vowed to build on the important "E-1" site, which lies between Jerusalem and the settlement of Ma'ale Adumim, and drives a wedge through the heart of the West Bank.

Elsewhere, Israel has been building bypasses in an attempt to redraw the map of the West Bank, continuing the construction of the hated "separation fence" and forcing thousands of people off their land by appropriating water required for irrigation. As Halper sees it, these actions were Israel's way of telling Obama to "go to hell" while he was preparing a peace plan to present at a UN summit in September.

Two states or one?

In the event, Obama failed to produce a plan of any kind. It was all that he could do to force Netanyahu and Abbas to shake hands in public. Abbas had always insisted that the resumption of negotiations would be dependent on a complete freeze in settlement building, and his position was officially endorsed by the US - in May, Hillary Clinton, the Secretary of State, said that the US "wants to see a stop to settlements - not some settlements, not outposts, not 'natural growth' exceptions". And yet, at the end of last month, she made the extraordinary statement that Netanyahu had made "unprecedented" concessions on "the specifics of a restraint on the policy of settlements".

It isn't clear whether this pronouncement was a consequence of the undiminished influence of the American Israel Public Affairs Committee, a reflection of Obama's wavering will in the face of Israeli intransigence, or evidence of hidden tensions within the US administration, yet Clinton's distorted language suggests that even she was embarrassed to be mouthing such nonsense: the only "restraint" that Netanyahu has offered is to restrict settlement construction in the West Bank to 3,000 homes that have been approved already by the Israeli authorities, and he has not considered any halt to construction in east Jerusalem.

It was Clinton's announcement that prompt­ed Erekat to break diplomatic cover. He said that Netanyahu had issued the Palestinians with an absurd list of preconditions to restarting talks, insisting, among other things, that Jerusalem would remain the "eternal and united capital of Israel", that the issue of refugees would not be discussed, and that Israel would not withdraw to the pre-1967 borders. "This is dictation, and not negotiations," Erekat said.

Such tactics serve only to entrench the paradox at the heart of Israeli policy: by humiliating its so-called "partners for peace" in the Palestinian Authority, and hastening the demise of the two-state solution, it seems determined to bring about what the majority of its citizens fear most - the prospect of Jewish Israelis becoming a minority in a single, bi-national state. Barghouti opposes the colonisation of Palestinian land represented by projects such as the JLR, yet he is glad that it is rendering the two-state solution practically impossible. "For over 25 years, I've supported the unitary, secular, democratic state solution for historic Palestine, because I regard it as the most ethical solution to all involved. It reconciles the inalienable rights of the indigenous Palestinian Arabs with the acquired rights of Jewish Israelis," he says.

It may not be as simple as that. Israel's ultra-nationalists are preparing for the day when the Jews find themselves in a minority in historic Palestine by proposing legislation designed to shore up the Zionist vision of a Jewish state. The Netanyahu government has adopted a bill brought forward by the radical ultra-nationalist Yisrael Beiteinu party of the foreign minister, Avigdor Lieberman, which sanctions three years' imprisonment for anyone who mourns the nakba - the Palestinian name for the events of 1947-48, when hundreds of thousands of Arabs were driven from their homes, and the state of Israel was created. And earlier this year, the Israeli Knesset passed the preliminary reading of another bill proposed by Yisrael Beiteinu: an amendment to the citizenship law that includes an oath of allegiance and stipulates a year's imprisonment for anyone who publishes a "call that negates the existence of the state of Israel as a Jewish and democratic state".

Neither Israel's 1.5 million Arab citizens nor the even greater number of Palestinians in the West Bank who would become part of a putative "Greater Israel" could be expected to recognise the contradictory notion of a "Jewish and democratic" state. If the day came when a Jewish minority found itself presiding over an Arab majority, then the focus of both the domestic struggle and the diplomatic and international effort would have to change: instead of attempting to create two separate states, the emphasis would be on securing equal rights for all the new country's citizens. It is a situation with an obvious precedent: Israel is already accused of running an apartheid regime in the West Bank, and the BDS movement targeting Israel for boycott, divestment and sanctions is beginning to assume the dimensions of the one directed against South Africa in the 1980s.

The sanction solution

Some maintain that targeting Israel for sanctions has grave consequences for the fragile Palestinian economy, though its proponents say it is the only effective way to force Israel to comply with international law. Either way, the movement is gathering pace. In the past few months, it has scored some notable successes, including one in the fight against the JLR. The French company Veolia, which owns 5 per cent of the City Pass consortium contracted to operate the line after completion, has come under concerted pressure to withdraw from the project. In 2006, the Dutch ASN bank broke off financial relations with it because of its involvement in JLR, and earlier this year a French court heard a lawsuit by a pro-Palestinian group demanding the project be halted on the grounds that it violates international law. Barghouti claims Veolia has lost billion-dollar contracts around the world as a result, and in September the company said it intends to sell its stake in City Pass to the Israeli Dan Bus Company.

If, or when, it does so, the focus of the campaign will switch to another part of the consortium - the French power generation and urban transport group Alstom. "In the coming weeks, Alstom will feel the heat, particularly in Arab states where it has won lucrative contracts," says Barghouti. The BDS campaign also claims credit for precipitating the financial collapse of one of Israel's most high-profile businessmen, Lev Leviev, whose company, Africa-Israel, built settlements in the West Bank.

Yet it was the British TUC's decision in September to mount a partial boycott of Israeli goods that convinced Barghouti the Palestinians' "South African movement" had arrived: he believes the endorsement of BDS "will reverberate across the world". It may even prove more significant than the best efforts of the Nobel peace laureate and his team of negotiators.