Sparked by a recent speech by U.S. President Barack Obama, a diplomatic battle is raging over how the borders between Israel and a future Palestinian state will be shaped, and whether those borders should be based on a controversial line drawn more than 40 years ago in the aftermath of a full-scale regional war.

Adding to the confusion, final borders were never determined after the 1948-1949 Arab-Israeli war that enshrined Israel as an independent nation and left neighbouring Jordan in control of the West Bank.

So when Israel captured the territory from Jordan in the Six Day War in 1967, the 1949 ceasefire line — the so-called Green Line — then marked the demarcation between Israel and what was later to become the Palestinian-controlled West Bank.

Since then, the reality of daily life on the ground has added to the complexity of the situation.

There are currently more than 280,000 Jewish settlers living in enclaves among more than two million Palestinians in the West Bank — a territory that Israel has never annexed but controls militarily and is referred to by some Jewish groups as the biblical lands of Judea and Samaria.

Palestinian officials, along with many in the international community and some Israeli peace groups, have decried the construction of Jewish settlements in the West Bank as illegal under international law — although Israel disputes this.

Earlier this month, U.S. President Barack Obama declared the United States supports a peace negotiation and the creation of a Palestinian state that would be based on the demarcation lines that existed before the 1967 war — ie. the Green Line — but also with "mutually agreed" territorial swaps.

The declaration received immediate backing from the so-called Mideast Quartet of international negotiators — the U.S., Russia, the UN and the European Union — but infuriated the Israeli government and, in particular, Prime Minister Benjamin Netanyahu.

Palestinian officials have said they accept the Obama policy as the basis for negotiations over the boundaries of a future state, but they have also indicated they will push unilaterally for recognition of statehood at the UN as early as September if there is no breakthough in peace talks.

It's up to the following players involved in the moribund peace process to agree to sit down at the negotiating table before then. Their public stances on the borders issue, and whether they're willing to show any movement, will likely determine whether that happens.

The players

Barack Obama

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U.S. President Barack Obama has recently pushed for border negotiations to be based on pre-1967 demarcation lines, but with land 'swaps' agreed upon by the Israelis and Palestinians. (J. Scott Applewhite/Associated Press)

In the early days of his presidency, Obama attempted to bring the Israelis and Palestinians back to the table with the stated goal of reaching a peace deal by September 2011.

In an attempt to stave off a September showdown at the UN, however, he applied pressure on Israel earlier this month by stating publicly that the U.S. position is that future borders would be based on the pre-1967 demarcation lines and adjusted through land swaps — a principle that could allow for Israel to maintain certain settlement blocs within its borders, as well as retain other territory for security purposes. Provided it was willing to give up something in exchange.

Obama has also said in recent weeks that no vote at the UN would ever create a Palestinian state, a strong indication that he will use Washington's Security Council veto to thwart such a move.

The president voiced hope that both sides would be able to tackle the border issue first before moving on to resolve what he called the more "emotional" issues of peace negotiations — the status of Jerusalem and the "right of return" for Palestinian refugees who lost property during the formation of Israel in 1948.

Obama defended his policy against criticism from Israel and at home, insisting the U.S. was not dictating to either party that the final borders mirror the pre-1967 lines.

"By definition it means that the parties themselves — Israelis and Palestinians — will negotiate a border that is different than the one that existed on June 4, 1967," the president told a pro-Israeli lobby group's convention on May 29.

Benjamin Netanyahu

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Israeli Prime Minister Benjamin Netanyahu insists his country will not accept the 'indefensible' pre-1967 demarcation lines as the basis for a future peace agreement. (Tara Todras-Whitehill/Associated Press)

U.S.-educated, Netanyahu returned for a second term as prime minister in March 2009 by forming a coalition government with disparate parties, despite his Likud party winning fewer seats than the centrist Kadima party. 

Viewed as a hawk on Israeli-Palestinian relations, Netanyahu stunned many in June 2009 by saying for the first time that he supports the creation of a Palestinian state. But only if Israel received prior international assurances that the new nation would have no army and only if Palestinians recognize Israel as a Jewish state.

However, despite strong urging by Washington and many prominent European leaders, Netanyahu refused to extend a moratorium on settlement construction in the West Bank or Jewish neighbourhoods in East Jerusalem, the long-time Palestinian neighbourhood.

That prompted the Palestinians to walk away from talks late last year.

In recent weeks, Netanyahu has hit out at Obama's borders policy, calling a return to the pre-1967 lines "indefensible" and insisting any territorial exchange must take into account Israel's needs to defend itself against future aggression; the Green Line boundary, for example, comes within 15 kilometres of certain Israeli cities.

He also cited "demographic changes" in the West Bank, a reference to the settlements.

In a speech last week to the U.S. Congress, Netanyahu urged Palestinian Authority President Mahmoud Abbas to "tear up" his recent reconciliation agreement with arch-rival Hamas.

Netanyahu said that the militant Hamas's refusal to renounce its charter's calls for Israel's destruction shows it is "no partner for peace."

Mahmoud Abbas

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Palestinian President Mahmoud Abbas has vowed to push for United Nations recognition of an independent Palestinian state in September if there is no progress in the peace process by then. (Majdi Mohammed/Associated Press)

The West Bank-based president of the Palestinian Authority has rejected Israel's latest vision of a Mideast peace agreement, saying he will unilaterally seek recognition of an independent state at the UN if there is no progress in negotiations by September.

Abbas, speaking Wednesday in Ramallah, said Netanyahu's speech a day earlier to the U.S. Congress "contained nothing we can build on."

"Our first choice is negotiations, but if there is no progress before September we will go to the United Nations," Abbas was quoted as saying last week to a meeting of the Palestinian Liberation Organization.

Abbas has brushed off international criticism of this month's reconciliation deal with Hamas, which seized control of the coastal territory of Gaza from Abbas's Fatah faction in 2007 and fought an intense conflict  with Israel in the coastal territory in January 2009.

Instead, Abbas used the occasion to deliver a scathing attack on Israel and say "it is no longer possible for us to accept the [Israeli] occupation of Palestinian land."

This newest deal between Fatah and Hamas makes no mention of relations with Israel — the issue that led to the collapse of the previous unity government involving the two rivals.

Abbas favours a negotiated peace with Israel, while Hamas has so far refused to formally accept Israel's existence. More recently, Hamas has been party to an informal ceasefire with Israel since the January 2009 conflict, but it has a long history of launching suicide and rocket attacks against Israelis.

Egypt

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Egypt started allowing more Palestinians to enter the country from Gaza at the Rafah border crossing on Saturday. (Suhaib Salem/Reuters)

Another player in this drama is Egypt, which neighbours the Gaza Strip and so controls the territory's main gateway to the outside world. Gaza is a Hamas stronghold and Egypt has long been pressured by the West to help control the flow of arms into the territory.

Over the weekend, eight days after the Obama speech, Egypt announced it would ease restrictions on Palestinians who wish to enter the country through the Rafah border crossing. However, the border will still be closed to trade.

Under the regime of ousted president Hosni Mubarak, Egypt had opened the border crossing only sporadically, creating a massive backlog and preventing the vast majority of Gaza's 1.5 million people from being able to travel abroad.

But the military council currently running Egypt until parliamentary and presidential elections has of late shown more interest in the Palestinian situation.

In recent months, Israel has also eased its four-year-old blockade of the Hamas-controlled Gaza Strip, which was aimed at isolating the militant group and preventing weapons from being smuggled into the territory for use against Israelis.

With files from The Associated Press