Despite Israel's promise to pull settlers out of Gaza, senior Palestinians are concerned its plans for Jerusalem are ruining any chance of a two-state solution.
From my terrace in an old stone house in this ancient city, I can see the future, or at least one vision of it.
Palestinians believe Israel's security barrier is really a land grab
The rough hand of change has been at work on the landscape.
In the distance, on a clear day, the hills of Jordan beckon.
But in the foreground, I can see a new monument to the conflict, a wall built of concrete and mistrust, snaking its way along the hills.
This is what Israel calls its security fence, its barrier against suicide bombers.
But within months the wall will seal off Arab East Jerusalem, which the Palestinians claim as the capital of their future state.
Two states for two peoples. That has been the accepted formula for resolving this conflict. But where is the space for a Palestinian state?
Watch carefully and you can see it shrinking, thanks to Israel's relentless construction.
Look east of the city, and you see the Israeli settlement of Ma'aleh Adumin, stretching across the hilltops, with its manicured lawns and neat houses. Suburbia grafted onto the occupied West Bank.
In defiance of international law, Israel plans to build another 3,500 more houses here, a massive project called E-1.
Israel's plans for Ma'aleh Adumin have caused anger and suspicion
If the plan goes ahead, the new settler homes will block the Palestinians of East Jerusalem from the remainder of their notional state, the cities and towns of the West Bank.
Without guns or bloodshed, Israel could achieve perhaps its greatest victory, winning control of all Jerusalem.
If you stand on the Mount of Olives in East Jerusalem the old city is spread out beneath you, like a table laden with the treasures of history, holy sites sacred to three faiths.
Outshining all else is the glittering golden roof of the Dome of the Rock mosque, part of the disputed religious compound claimed by Muslims and Jewish people, where the second Palestinian intifada or uprising erupted.
Professor Jeff Halper joined me to admire the view.
This Israeli anthropologist is an impassioned defender of human rights, and a critic of his own government's policies.
For more than 20 years he has been charting the changes in the city.
His conclusion is blunt. "Jerusalem is being grabbed," he says, "and turned into a Jewish-only suburb."
"You already have the huge settlement blocks," he says, gesturing to the outskirts of the city.
"And the Palestinian part of Jerusalem is being fragmented, turned into a bunch of disconnected enclaves.
"That means the entire economic heart of any potential Palestinian state is gone.
"The Palestinians will be doomed to a third world existence. Instead of the city of peace, Jerusalem will be the source of perpetual conflict."
Even the Americans are concerned.
President George W Bush wants Israeli Prime Minister Ariel Sharon to stop building in Jewish settlements and drop the E-1 plan.
Despite pressure from abroad Mr Sharon is not giving in.
But so far the Israeli leader is not giving way.
He believes that under any final peace deal he will hang on to the major settlement blocs in the West Bank. And for now he wants to keep creating facts on the ground.
Israel's argument is that E-1 is only at the planning stage, and there are no immediate moves to build.
Officials hint the plan might be dropped one day.
Even if it goes ahead, the Israeli foreign ministry claims the West Bank will still be large enough to house a functioning Palestinian state.
Jeff Halper sees it differently.
He traces the outline of the planned expansion of Ma'aleh Adumim on a map, showing how it will close off East Jerusalem and split the West Bank in two, north and south.
"I do not believe there is any way back to a viable two-state solution," he says.
Looking at the lines on the map, it is hard to argue.
A short distance away is the Arab neighbourhood of Abu Dis.
Follow the steep road that winds past the cave, said to be the tomb of Lazarus, and you arrive at a place where Israel's wall stretches across the hills.
It runs right through the land owned by Ziad Abu Zyad, and he tells me poetically, "right through his heart".
This elegantly dressed legislator was elected to represent the Palestinians of East Jerusalem, but has not set foot inside the city in a year, not even to pray at the mosque.
Like other Palestinians, he now needs Israeli permission to enter Jerusalem. And he cannot get it.
"Jerusalem is the symbol of dignity for the Palestinian people," he says. "It is a sensitive nerve, not just for every Palestinian, but for every Arab and every Muslim."
"If Israel builds the E-I project, it is finished. There will be no room for speaking about a political solution," he concludes.
Israel calls Jerusalem its eternal undivided capital, though the international community does not recognise its claim to the entire city.
The theory is that Jerusalem is a so-called final status issue, so contentious it can only be resolved in peace talks somewhere down the line, if the two sides ever get that far.
And in the meantime, the view from my terrace keeps changing every day, right before my eyes.
From Our Own Correspondent was broadcast on Thursday, 28 April, 2005 at 1100 BST on BBC Radio 4. Please check the programme schedules for World Service transmission times.