this plan was revealed literally within hours of the palestinians winning an upgrade in their UN status at the UN general assembly. now that palestinian is a "non-member observer state" at the UN, israel's government responds in kind by threatening to build settlements on the part of the west bank which the palestinians want as their capital if the two-state solution is ever resolved. this settlement bloc has been in the works for over 10 years but never implemented because of US pressure not to build on such highly disputed territory.

israel also refuses to release $100 million to the PA out of spite for the UN status upgrade. this is money that israel holds in trust for the PA so that palestinians can have a quasi-government that takes care of their day to day operations (think normal governmental functions like schools, roads, security forces, etc). by refusing to release the money as they are obligated to, israel is effectively forming its own unilateral economic sanction/blockade of the palestinian people. as usual, israel collectively punishes the palestinians when they feel like it. maybe this time around the pressure for israel to do the right thing will win out, but i am sure that, as usual, israel will continue to refuse to change for the sake of peace....

The summoning of Israeli ambassadors to the foreign ministries in London, Paris and Stockholm may be only the opening phase in the diplomatic crisis prompted by Israel's decision to build some 3,000 housing units in East Jerusalem and the West Bank, as well as plans to push ahead with construction between Jerusalem and the settlement town of Maale Adumim.

These governments have long insisted that all Israeli settlement activity is illegal under international law.

But in general terms, apart from rhetorical criticism and statements, little practical action has been taken. The disapproval has been registered but settlement construction has continued.

But what makes this crisis different is the fact that it was in many ways unexpected.

The nature of what is being proposed is a significant shift in Israeli policy.

Furthermore, the timing of the Israeli government's decision, and the broader political and diplomatic context in which it has been made, makes this diplomatic tussle potentially different from previous episodes.

Israel is responding to the United Nations General Assembly vote that granted the Palestinian Authority permanent observer status at the UN.

While many of Israel's friends in Europe backed the Palestinian bid, the US resolutely opposed it and Britain abstained.

Neither country believed that the Palestinian move was a positive step towards peace.

However, all the indications were that Israel's response would be largely rhetorical.

Practical steps would be reserved for a later stage, should the Palestinians, for example, seek to join the International Criminal Court (ICC).

Instead, Israel has launched something of a diplomatic bombshell.

Prime Minister Benjamin Netanyahu's own rhetoric has been especially severe. He described the UN decision as an "attack on Zionism and the State of Israel" and vowed to "reinforce and underscore the implementation of the settlement plan."

Israel is not only withholding tax revenues that it collects on behalf of the Palestinian Authority. It is determined to build new housing units in the area known as "E1" between Jerusalem and Maale Adumim.

This is no ordinary settlement-building plan.

This area is controversial because construction there would pose a major obstacle to a contiguous Palestinian state on the West Bank and divide such an entity from Jerusalem, which the Palestinians see as their future capital.

So sensitive is this area that successive US Presidents have been assured by Israeli governments that construction would not proceed there. Mr Netanyahu is turning his back on these assurances.

The stage is set not just for a very bumpy period in diplomatic relations between Israel and countries that it regards as its closest friends. Israel-US ties in particular could be seriously damaged.

This episode comes in the wake of the recent Israeli operation against Hamas in the Gaza Strip in which the US and key European governments were remarkably sympathetic to Israel's security concerns.

The upsurge in fighting, hard on the heels of President Barack Obama's re-election, was seen as marking something of a rapprochement in ties between Israel and Washington after a very tense period.

Now this rapprochement could be in question.

What is even more curious about this whole episode is that several respected Israeli commentators, including one analyst at the premier defence think-tank, INSS, have suggested that the Palestinian vote at the UN is nothing to get excited about.

Indeed, in many ways the resolution backs a two-state vision of a Palestine established alongside Israel - supposedly the goal of successive Israeli governments.

Palestinian tax revenues have been held back in the past, though Israel has usually relaxed the restrictions after a few weeks.

Some Israeli analysts note that squeezing the Palestinian Authority financially is in nobody's interests since Israel depends upon the PA's security forces to maintain order in much of the West Bank.

But it is the decision to unfreeze planning for construction in E1 which may be the critical factor here.

The pressure will be on to get Mr Netanyahu to reverse this step, though with a general election due in Israel on 22 January and his own Likud Party moving decisively to the right, the next Israeli government's true policy may not be clear until well into next year.

This is where the broader regional context comes in.

The heady hopes invested in the so-called "Arab Spring" have now been replaced by a guarded optimism - a hope that out of the uncertainty in Egypt, the chaos in Syria and the wider tensions rippling out through the Middle East, something better will come.

There is a growing diplomatic impatience in the West with the failure to resolve the Israel-Palestinian dispute - a rising sense that something must be done.

British Foreign Secretary William Hague has explicitly called upon the US administration to launch a new peace initiative.

It could be one of the most important decisions facing Barack Obama at the start of his new term.

But don't hold your breath.

The appetite in Washington for a full-scale return to Middle East peace-making may be limited. Relations between Mr Netanyahu (the likely winner of the Israeli election, at least at this stage) and Mr Obama are poor and getting worse.

The need for a peace agreement is becoming ever more urgent - the means of bringing one about, more constrained.